Firms switch to rupee loans for better rates

According to bankers, a one-year dollar loan is now priced 60-65 basis points (bps) higher than a rupee loan after hedging. As the tenor increases to 3-5 years, the interest rate differential narrows to 25-50 bps. One basis point is one-hundredth of a percentage point.

“Corporates follow a calibrated approach while borrowing in terms of tenor, rating and their end use requirement. They are going for rupee loans if the requirement is for shorter term loans,” said Shankar Subramaniam, India head of corporate banking at Bank of America. Widening tenor opens up more options for borrowers, he said, adding, “most of the funds raised are for working capital requirement or refinance. We haven’t seen much of borrowing for capex requirement.”

Bankers say that much of the demand was seen during the first half of the year before the rate hike cycle began. According to Reserve Bank of India data, companies raised external commercial borrowings (ECBs) of $22.87 billion during the January-August period this year, 13.3% below $26.3 billion raised during the corresponding period last year.

Rising interest rates in advanced economies, falling rupee and stiff competition among Indian banks for corporate loans have led to finer pricing of rupee loans, dissuading companies from going for ECBs. The decline in funds raised as ECBs comes despite the limit under the automatic route being temporarily doubled from $750 million per financial year to $1.5 billion, and the all-in cost ceiling under the ECB framework also being raised by 100 basis points.