Banks raising cheap $ funds abroad

 Banks are making the most of the dollar shortage and corporate appetite for cheap dollar funds by raising short-term resources overseas. By doing so, they are making a neat spread of anywhere between 30 to 300 basis points.

 Capitalising on the dollar demand of exporters/ corporates, banks are using the services of their London branch or correspondent banks overseas for the purpose.

 Close on the heels of Bank of Baroda (BoB) raising $140 million for one year at 45 basis points (bps) above the London Inter Bank Offered Rate (Libor) early this week, Canara Bank and Corporation Bank are seeking to raise $50 million each. In early September, Bank of India had raised $100 million for one year at 43 bps over Libor.

 Banks are allowed to raise up to 25 per cent of their unimpaired Tier I capital from overseas markets.

 They raise one-year dollar funds at Libor (1.34 per cent) plus a premium of about 45 basis points and lend (arrange external commercial borrowing) to the corporates at a little over four per cent on a fully hedged basis.

 In case of exporter-clients, however, banks will make less as the regulator has stipulated that they should get dollar credit at not more than 75 bps over Libor.

 So, instead of borrowing short-term rupee funds at 5.50-6.00 per cent, corporates are well off borrowing in dollars.

 Also, thanks to the bullish outlook on the rupee, corporates may end up paying less on maturity of the borrowing.