With funds turning expensive in India, government-owned banks are turning abroad to raise resources. At least half a dozen plan to raise funds by end-March through medium-term notes (MTN) and more are expected to follow.
Mumbai-based Bank of India’s (BoI) top management is currently in London, meeting investors for an MTN issue. In November, the bank had raised around $500 million though a similar route and the bank is again exploring the possibility. State Bank of India had raised ¤750 million via MTN in November. Bank of Baroda, Indian Overseas Bank (IOB), IDBI Bank and Syndicate Bank are some others exploring the possibility of raising between $250 million to $1 billion each by March.
“We are planning to raise $1 bn via the MTN route in two phases. The first phase, in which $500 million will be raised, is planned in the current financial year,” said M Narendra, CMD, Indian Overseas Bank.
Most of the banks planning an MTN programme are waiting for the right opportunity to tap the market. Says IDBI Bank’s chief financial officer, P Sitaram, “It is entirely driven by market conditions. If the rates are favourable, banks will be willing to raise funds through MTN. Like other banks, we are also ready with our MTN programme. At any time when we find the rates favourable, we will also go for an MTN issue.”
Bankers said the differential during the past year in rate differentials between domestic and foreign markets had widened, encouraging them to look at the possibility. “Six-month Libor (London Interbank Offered Rate) is below 1 per cent. So, even if we raise at Libor plus 280 bps, it is still cheaper than funds here, as bulk deposit and certificates of deposit rates are close to double-digit,” said an official of IOB.
Though MTN is raised at a fixed rate, banks swap it to a floating rate by paying a premium in order to protect them from volatility. This enables protection of margins.
Another reason why the MTN route is becoming popular is the rising number of Indian companies expanding in foreign territories. “With more and more Indian corporates going abroad for expansion, it gives us an opportunity to deploy the resources. Banks fund the external commercial borrowing of companies,” said a senior executive of BoI.
Deposit mobilisation in the current financial year is far below credit offtake, which may lead to a widening asset-liability gap for banks. To make deposits attractive, banks have raised interest rates by around 250 basis points since October. However, loan growth has continued to outpace deposit growth. While deposit growth was 16.5 per cent in the past one year, credit growth was 23 per cent.
