Taking Foreign Currency Loan to Raise Money

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Indian companies are finding foreign currency loans cheaper than raising loans in local currency directly. This is because the London interbank offered rate, or Libor, an international reference rate for financial transactions, is attractively low.

Companies generally take loans in foreign currency if they are executing any project outside India or acquiring some assets and companies. Sometimes, companies take this route for refinancing existing loans (with high-interest rate) with a loan in foreign currencies (low-interest rate).

When taking a loan in foreign currency, companies generally take a forward cover. A Forward cover is a sort of insurance against currency fluctuations. If the borrower does not take such cover and the rupee depreciates against the dollar, costs will go up substantially as it would need to buy dollars from the market for repaying the loan. However, if a company earns its revenue in the dollar, then the company need not take a hedge.

Take a shipping company for example. To acquire a ship, ship-owner will take a loan in foreign currency. Ship-owner will earn revenue in dollar terms. So any fluctuation in foreign currency gets offset in this process. This is called as a natural hedge.

When we are talking about the loan in foreign currency, it is important to consider rupee depreciation. The weakening rupee has made life even more difficult for Indian companies whose books are already loaded with debt. Companies with foreign currency loans are seeing an increase in interest payouts on account of a weaker rupee. The fall in rupee adds another layer of challenge to the highly leveraged companies who are either net importers and/or have foreign currency debt liability.

As per the latest article in Business standard, Indian companies, especially public sector companies such as Oil India, Indian oil and Bharat petroleum are set to raise about US$ 5 billion. Most of the debt will be utilised for funding acquisition abroad. These companies are set to acquire 23.9% stake in Russia's Vancor field for US$ 2 billion.

Private companies are hardly raising any money in foreign currency. The ECB (external commercial borrowings) volume has significantly reduced. As per the latest data available on the RBI website, ECB in the month of May 2016 declined by about 45% on YoY basis. Low demand, leading to under-utilized capacity, is weakening risk appetite for credit even from the cheaper international market. It is important to note that low rates are only available for companies with good credit rating.

As per CMIE Study, projects under implementation by the private sector were at least 10% lower than projects under implementation by the government. The private companies announced projects worth Rs 11,300 billion during 2014-16. Out of this, only a third has gone for implementation. Whereas of the Rs 7400 billion new investments announced by the Modi government during the last two years, 60% have already gone under implementation.

Higher demand will lead to higher capacity utilisation and once this happens, the private sector companies will think about increasing capacities. Only then, there could a demand for foreign currency loans from this private sector.

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