Demand drives banks' overseas fund-raising

Robust demand from mid and small-sized Indian companies is driving the fund raising exercise by public sector banks from overseas.

Because of lower ratings, these companies would have to pay higher rates if they raised money directly, through bonds.

On the other hand, public sector banks, because of sovereign guarantees, raise the money at a cheaper rate.

"Today, foreign currency loan rates are low. With the current rate increases in India, it becomes even cheaper to raise money abroad.

"So, we are lending the money back-to-back, as we borrow," said IDBI Bank Chairman and Managing Director RM Malla.

As part of its $1.5-billion medium-term note plan, IDBI Bank would raise Swiss franc 200-300 million this week.

The amount raised in Swiss francs would later be swapped into dollars for lending.

The bank had raised around $400 million in tranches in the last financial year and plans to complete the entire borrowing programme in the current financial year.

While the interest rate differential between India and foreign countries is favorable, companies are also taking advantage of the lower spreads that Indian public sector banks enjoy.

"The risk is based on the public sector bank, not the ultimate borrower. The public sector bank shares the country's sovereign rating, which helps in raising funds at a cheaper rate than corporates," said a bond dealer with a brokerage firm.

In the current interest rate scenario, an Indian state-run bank would have to pay a rate 200-300 basis points above the London Interbank Offered Rate, while spreads would be higher for a company with a lower rating.

While Bank of India would raise $500 million, Indian Overseas Bank would raise $350 million in the next few months to cater to the needs of Indian companies for foreign currency funds.

Another public sector lender, Syndicate Bank, recently raised $500 million through five-and-a-half-year bonds.

Analysts at Royal Bank of Scotland feel India is likely to overtake Korea to become Asia's largest issuer in the financial sector. Demand from Indian companies is driving bank's overseas issuances.

"Indian companies have become more aggressive on overseas acquisitions and expansion, and this requires Indian banks to provide financing," RBS said in a report.

The Reserve Bank of India raised key policy rates by 50 basis points last week. This triggered lending rate increases by most banks, making it costlier for companies to raise funds in India.