The high interest rate regime has pushed up the Indian Railways’ cost of borrowings by a percentage point to 8.6 per cent so far. Its borrowing vehicle, Indian Railway Finance Corporation (IRFC), will be raising Rs 20,594 crore this year — the highest-ever fundraising in its history.
IRFC is hoping that its average borrowing cost may come down partially in the course of the year as it goes in for cheaper overseas funds and tax free bonds.
“Our total weighted average cost of borrowing last year was 7.62 per cent,” says a senior IRFC official. “This year, we are expecting that the cost will go up because even after we issue tax free bonds, the weighted average cost will not be less than 8.2 per cent. So, we will have to pay almost 60 basis points more this year.” A significant portion of the railway borrowings this year, comprising Rs 10,000 crore, would be through tax-free bonds leaving IRFC with Rs 10,594 crore to be raised through other instruments.
“For tax free bonds, we are still awaiting notification to be issued by the ministry of finance,” adds the official. “We have sent a proposal in early April, but are yet to get it. We hope the approval will come sometime this month.”
Within a few days of approval, the company will be in a position to float the bonds. “Apart from the public issue,” the official adds, “we may also go in for private placement of tax free bonds. Private placement will mobilise Rs 2,500-3,000 crore. The remaining will be raised through the public issues — that is, Rs 7,000-7,500 crore.”
Private placement would be followed by a public issue. The whole process would take eight weeks to be completed. IRFC had raised Rs 1,350 crore last year through similar bonds and Rs 2,000 crore in 2009-10. “The amount being raised this year is significantly higher than what we have done in the past,” notes the official.
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“IRFC along with other entities will raise a total of Rs 30,000 crore through this route. The market appetite may be at a lower level of around Rs 20,000 crore. If we run short of the target of Rs 10,000 crore, we will ask the government to roll over the facility for next year. We can raise the remaining amount through the other options available to us,” he says.
IRFC has already raised $500 million in the overseas market so far in this financial year. Two transactions of overseas issues have been tied up. Money for $200 million from the second tranche will come in September. The company has already raised about Rs 7,000 crore from the domestic market in the current year.
The weighted average cost for domestic borrowings is about 8.6 per cent. External commercial borrowings cost is around 6.75 per cent after hedging. On whether more rate hike by the Reserve Bank of India will further add to their costs, the official says a likely hike of 25 basis points will not affect the tax free bond market.
“I think one more hike and after that a stability will be there and the interest rates will have to move down. The realisation is gradually dawning that inflation cannot be controlled through this route alone. RBI will have to think of other means,” he says.
Till the end of last year, IRFC debt assets for the Railways were Rs 69,855 crore besides Rs 2,400 crore for other entities like RVNL, RailTel and Konkan Railways Corporation. According to IRFC estimates, the Railways would need to go in for high borrowings even next year after which internal revenue generation would improve and wage expenses would be under control.
IRFC in recent times has been making repayment of around Rs 4,000-4,500 crore annually from a level of Rs 2,000-2,500 crore earlier.
The railway borrowings are growing at a compounded rate of 20 per cent in the last 20 years.