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Re debt-dollar swaps saved a pile for corporates

BS Banking Bureau

Majority of Indian corporates raised debt in rupees and swapped the money thus raised into dollars during the last financial year (2001-02).

They resorted to this route to raise debt, which has been estimated at around Rs 500 billion during the period, as it worked out to be cheaper by around 60 basis points compared wiht directly raising debt in dollars, which has been ruling strong against other world currencies.

"The five-year debt could be raised on an average at 8.80 per cent in 2001-02. This debt, when swapped into dollars, works out to an interest rate of Libor (London inter bank offered rate) plus 20 basis points. However, if a corporate entity directly borrowed in dollars, the interest rate was Libor plus 80 basis points," said Alok Agarwal, treasurer, Reliance Industries, at the Confederation of Indian Industry summit on banking.

Tracing the movement of spreads on AAA-rated papers, he said it was 230 basis points over the government security of corresponding maturity a couple of years ago, declined to 80 basis points over the gilt for most part of 2001 and again jumped to 180 basis points over the government paper in the last few months.

Agarwal pointed out the US Federal Reserve has kept the dollar strong and this has resulted in the unhedged cost of borrowing in pound and yen to be lower when compared to borrowing in dollars.

R Ravimohan, managing director, Crisil, said that in the east Asian and south-east Asian countries such as Thailand, Indonesia, Philippines and Malaysia the domestic debt issuances in 2001-02 had been in local currency as interest rates had declined and the greenback had strengthened.

Nachiket Mor, executive director, ICICI Bank, in his presentation on "Building blocks of bank management" said banks need to split their balance sheet on the basis of liability bank, asset bank and a mismatch bank so that they can better handle the transfer pricing issues.

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