The ECB rush

Given the lower interest rates abroad, now smaller companies are also raising foreign currency loans.

With the domestic interest rates fast firming up, small and mid-sized Indian corporates are rushing abroad to raise external financing which would result in substantial savings on their balance-sheets.

"Rising domestic rates are a clear driver for these corporates to go for overseas financing. As the difference in rates offered by the local banks and international lenders are as high as three per cent to four per cent excluding the forward cover cost, it makes more sense for these companies to raise funds from abroad now," said Ajay Arora, partner at management consultancy firm Ernst and Young.

This trend would remain active in the months to come as domestic rates are not showing any signs of cooling down, Arora added.

Said Chanda Kochhar, deputy managing director of ICICI Bank, "With current interest rates, foreign currency funding is cheaper than the rupee funding." However, she warned that one must remember that these arbitrages are always short-lived.

ICICI Bank, she said, has helped more than 100 companies raise $ 9 billion in the last 12 months. "This number is growing at over 100 per cent per annum and we expected it to more than double this year," she said.

The external financing, however, is slightly expensive for mid-sized companies as big corporates can negotiate better rates due to the strength of their balancesheet.

"Mid-sized companies could raise a loan at of 9 to 10 per cent a year which is still lower than the prime lending rates of the local banks which are hovering at around 12.5 per cent to 14 per cent," said D R Dogra, Executive Director of rating firm, Care Ratings.

"There is, thus, a clear shift in the composition of loans with the mid-sized corporates preferring the overseas route," he added.

Nandakumar Surti, chief investment officer of JP Morgan Asset Management agreed.

"With the US interest rates having peaked out, Indian corporates will find it cheaper to raise debt abroad. Even a small ECB loan can bring down their overall cost of borrowing. This will be true especially for the smaller companies."

The thumb rule of raising an overseas loan is that the loan size should not be more than a quarter of company's gross turnover.

With inputs from Gayatri Ramanathan

ARBITRAGE OPPORTUNITY

Indian corporates have devised a novel way to make some extra money. Many companies who are raising cheap overseas loans are parking the proceeds in the local banks fixed deposits, thus earning on the interest rate arbitrage.

Though the Reserve Bank of India regulations are clear and strict on the end use of external commercial borrowings (ECBs) and ban any diversion of funds, the companies are circumventing the rule by scooping out an amount _ equivalent to the overseas loans _ from their internal accruals and investing in the short term fixed deposits.

The companies, which have significant export earnings and serve as natural hedge need not to even take the forward cover thus increasing their margins.