Indian companies have got one more avenue to raise cheap loans in foreign currency.

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Indian banks have reduced interest rates on foreign currency loans, financed generally from foreign currency deposits by non-resident Indians, by 100-150 basis points.

The interest rates on these loans now range between 200 to 300 basis points over Libor (London inter-bank offered rate). Libor ranges between 0.15 per cent and 0.68 depending on the tenure under consideration.

“With the cost of a forward cover of 2 to 3 per cent, the cost of these loans could go to 6 to 7 per cent,” said a Bank of Baroda (BoB) official. At 6-7 per cent, the loans are much cheaper compared to rupee loans at upwards of 9-10 per cent.

“For working capital requirements, companies are preferring foreign currency loans to external commercial borrowings (ECBs), as there are no formalities for these loans and that end-use restrictions do not come with the loan. Large companies and large public sector undertakings are using up credit through this route,” said a senior SBI official, who handles foreign currency credit for Indian clients.

FCNR deposits are normally lent to exporters, who largely borrow in foreign currency as export proceeds in foreign currency eliminates currency risk for them. With exports still to pick up and the interest rates falling on these loans, the banks are channelising these deposits as Foreign Currency Term Loans (FCTL) to companies.

“Our spreads are under pressure. But there is a demand from large corporate customers who want something cheaper than the domestic credit,” the SBI official said. To take advantage of the arbitrage opportunities, banks are also borrowing from the overseas market and on-lending to their clients in India who are scouting for cheaper source of working capital.

“For a company with a large requirement, banks would give at 200 to 300 basis point above Libor,” the BoB official said. BoB has $1.3 billion in FCNR deposits. Banks agree that the credit spreads on foreign term loans are under pressure. “Since money is available cheaper overseas, banks borrow in the market and mark-up and on-lend it to companies who need working capital. This arbitrage opportunity is being utilised by most banks,” said a senior Punjab National Bank official.