Cos Seek RBI Help to Cut Dollar Loan Costs

Banks and cos want RBI to allow all companies to access simple derivatives to reduce their financing costs

Banks and corporates are hopeful that the Reserve Bank of India will change rules to allow many infrastructure and unlisted companies to lower the cost of their dollar loans. 
Large private sector and MNC lenders recently met senior central bank officials to discuss the possibility of allowing all companies access to certain simple derivatives to reduce financing cost. At present not all companies are allowed to carry out these transactions, better known as cost reduction derivative strategies. While many companies are going for foreign exchange loans, thanks to the abundance of dollar liquidity in international money markets, the cost of such borrowings becomes prohibitive if they have to fully hedge the currency risk. But the cost can be lowered if they enter into a 'call spread' derivative contract that partly hedges the underlying loan. 
"Various banks have met RBI to put across their point. We feel the regulator will soon take a call because checks and balances are now in place," said the treasury head of a foreign bank. Banks are not asking for reintroduction of complex and exotic products which are barred by RBI regulations. However, allowing simpler and safer structures to a wider universe of companies over and above the plain vanilla options will enable many corporate borrowers to prune cost and take advantage of the global dollar liquidity. 
At present, most companies are going for straight-forward option deals that give them an opportunity to buy dollars at the end of three to four years when the foreign currency loan has to be repaid. But the premium they pay on such options largely offsets the cost advantage of a cheaper external commercial borrowing. But, if a borrower strikes a deal where he simultaneously buys and sells call options, then the premium received from selling the option lowers the loan financing cost. In other words, the net premium a company pays in such 'call spreads' is lower than that paid for a plain vanilla option. Here's how such twolegged transactions work: A company buying a call option has the right (but not the obligation) to buy dollars at a specific dollar-rupee exchange; and, when it sells a call option, it has the obligation to sell dollars at another prefixed rate. The company doing the deal takes a view that dollar will not appreciate beyond the point at which it sells the call option. 
These deals are restricted to listed companies and their associate entities or firms with a minimum net worth of . 200 crore. "But there are many companies in infrastructure and other segments where the parent is unlisted and the special purpose vehicles formed for the projects are not adequately capitalised. 
In these deals, the company surrenders some of the upside. But it's far better than keeping a dollar loan unhedged which is a risky proposition or going for a full hedge which can be very expensive," said another banker. 
According to a senior official of a local private sector bank, lenders have also sought some relaxations in the documentation procedure that have been made compulsory for derivative transactions. "Getting a board resolution that authorises a person dealing in derivatives can be time-consuming when one is dealing with public sector companies, many of which have a big appetite for forex loan," said the person. In a call spread deal, companies have to provide for possible mark to market losses on derivatives because the loans are not fully hedged. "But most borrowers are fine with this as long as the financing cost comes down," said a senior dealer. 
sugata.ghosh@timesgroup.com