The falling value of rupee may make the foreign loans availed by the Indian companies this year costlier by an estimated over Rs 25,000 crore (about $five billion), if the current currency valuations persist, experts have warned.

The corporates had been increasingly tapping overseas loans, mostly in the US dollar, till a few months ago to save costs arising out of higher interest rates and liquidity constraints within the country, but the subsequent fall in the rupee value has negated the benefits, experts believe.

Indian companies have borrowed close to $29 billion in foreign currencies, through ECBs (External Commercial Borrowing) and FCCBs (Foreign Currency Convertible Bonds), since the beginning of this year, as against such loans worth $18 billion during the entire 2010.

A sharp fall of about 17 per cent in the value of rupee - from near Rs 44-level against the US dollar at the start of 2011 to below Rs 51-level currently - has made the cost of repaying these foreign loans costlier by a similar margin.

For example, an Indian company would now need to pay an amount of about Rs 5,134 crore (based on current rupee value of Rs 51.34 per US dollar) towards the principal amount to a bondholder of $1 billion, while a similar loan amount would have been worth about Rs 4,400 crore at the beginning of 2010, a banker said.

Adding to the woes of the companies, the shares of the companies having issued FCCBs have fallen sharply since the time of their issuance, thus making it unattractive for the bondholders to convert their loans into equity.

As per the estimates, FCCBs worth about $10 billion are due for redemption in the next 12-18 months and over 80 per cent of these bonds might not be converted into shares, said an official with a private sector bank advising some companies on restructuring on their foreign loans.

The possibility of such a scenario increases the risk of loan default by their issuer companies, he added.

SMC Global Securities’ Strategist and Head of Research, Mr Jagannadham Thunuguntla, said that the additional burden due to the rupee depreciation so far this year could be of Rs 25,200 crore for the Indian companies on their ECBs worth about $30 billion raised this year.

Ashika Stock Broking’s Research Head (Equities) Mr Paras Bothra said that the liabilities for the companies having raised these loans a year ago could be about 10 per cent and above on the principal amount, if the their loans mature in the current situation.

(This article was published on November 20, 2011)
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