Foreign Currency Loans
What are foreign currency loans?
These loans are
denominated in foreign currency. The principal
as well as interest need to be serviced in foreign currency. In case the business is earning foreign
currency through export of goods or services, it can service the foreign
currency loans out of the foreign currency remittances against the exports. In case the company is not exporting and
caters to Indian market alone, then the company has to buy the foreign currency
required pay interest or repay the loan from authorized foreign currency
dealers (this is permitted by RBI for legitimate, trade transactions).
Why foreign currency loans?
Interest rates
in India are high compared to those prevailing in advanced countries (typically
4-5% p.a.). High interest rates, coupled
with sluggish economic conditions are making borrowing costs unsustainable. The reserve bank of India (RBI) is rightly
not lowering interest rates in the face of stubborn inflation, high fiscal
deficit and unsatisfactory economic growth.
In this
scenario, companies are looking to raise cheaper foreign currency loans to meet
their fund requirements.
What are the various kinds of foreign
currency loans?
Long term loans:
· External Commercial Borrowings
(ECBs)
· Foreign Currency Term Loans
(FCTLs)
· Foreign Currency Convertible Bonds
(FCCBs)
Short term loans:
· Foreign Currency Packing Credit
(PCFC)
· Foreign Currency Bill Purchase/
Discounting (FCBP)
What is the rate of interest?
Foreign currency
loans priced by adding a spread to the London inter bank offer rate
(LIBOR). The spread added by the lending
banks is usually 2.5-4%. LIBOR itself keeps
fluctuating depending on market conditions, but in the present conditions
(August 2012) it is less than 1%.
Therefore, today a foreign currency loan can be obtained any where
between 3.5 to 4.75%. This rate/ cost is
bare cost and does not take care of the currency and/ or LIBOR fluctuation
risks.
Hedging Cost
In order to
protect one self from currency and LIBOR rate fluctuations, one has to incur
hedging costs. Foreign currency earners can avoid hedging against currency
fluctuations, but still have protect themselves against fluctuations in
LIBOR. Hedging costs themselves
are not static, but quite dynamic.
Finally, in the
present scenario, an exporter may be able to raise foreign currency loans in
the range of 5.5-6%. A domestic player,
without a natural currency hedge will be able to raise a foreign currency loan,
fully hedged, at about 10-11%.
Contact us! We arrange all kinds of foreign currency
loans.
Tel: 0124-4386541; Cell: P.Anand (Director) +91-9560400681, Suresh Sharma (Customer Support
Manager) 9312636681.
anand @ acebuiss.com / sales @
acebuiss.com
Professionals