A study on foreign currency funding option

Globalization of economy has resulted in interlinking of financial markets in different countries into a common worldwide pool of funds to be accessed by borrowers and lenders alike. No sector of the economy seems to be more global in its orientation and operations than finance. To succeed in an increasingly competitive environment, companies have widened their operations to produce and sell goods across a wider spectrum of markets. This resulted in active trade and economic activity.

After the globalization, cross-border controls on movement of capital, technology, goods etc., were lifted. Consequently, reforms in trade, industry, and financial and other sectors were initiated. Foreign technology, goods and capital started flowing into the country posing a serious challenge to the high cost domestic industry in terms of technology, quality of resources, productivity, and price-competitiveness.

It has become imperative for the domestic companies that they should achieve technological and scale of operations parity with global competitors for sheer survival. The grossly underdeveloped state of our infrastructure facilities like power, transport, communications etc. could not obviously support this mammoth effort.

Companies need finance to import capital goods, raw materials, technology and services. They also require finance at the pre-shipment and post shipment stage of export. These credits should be available to the companies at very competitive rates of interest to compete in international markets.

The domestic financial market is beset with number of problems. First of all the money is not enough to support large capital-intensive projects. The capital market is rather shallow. Secondly the cost of capital is very high with real interest (inflation adjusted nominal interest rate) ruling far above the global levels. Thirdly, the domestic banks have meager capital base and are plagued by high NPA levels. Domestic banks suffer from structural deficiencies, poor asset/ liability management etc.

Therefore, the cost of their intermediation is very high which they are able to meet by keeping large spreads on loans. The domestic market has a limited product range. With a view to give level playing field to the companies, Government of India came up with the necessary regulatory measures to help the Indian companies to have easy access to foreign capital at a much cheaper rate of interest.

[...] DESIGN OF STUDY 2.1 Statement of the Problem Foreign currency funding option as a part of corporate finance is becoming more and more important for every bank. State bank of India is a participant in this activity. This study as therefore takes an overall view of Foreign Currency Funding activities Major players in the foreign currency funding options. The entire study tries to give a broad idea about the foreign currency loans in Indian banking and State Bank of India’s contribution in the international banking services Scope of the study India is getting converted into service economy from agricultural economy. [...]

[...] Cost of availing Foreign Currency Loan 6months LIBOR on the date of negotiation Spread for availing currency Forward contract rate for 6 months Total Cost Conclusions: Total Savings by availing Foreign Currency Loan for Buyer’s Credit for 6 months is A-B i.e - 3.85 = Amount of Loan availed by a company is 6,772,000 USD which is equal to Rs 96,000/- (Exchange rate 46.80 ) A. Cost of availing Rupee Loan domestically 46,410/- B. Cost of availing Foreign Currency Loan LIBOR on the date of negotiation Spread for availing credit up to 120 days Forward Contract rate of 120 days for Repayment of the principal & interest Total Cost 93,017/- Conclusion: Total Savings by availing Foreign Currency Loan for import of goods for 120 days A-B ( 12.50 - 4.60 ) = 7.90 In Rupees the company is saving 80,53,393/- ECONOMICS FOR PCFC LOANS A company takes Export Credit at pre-shipment stage in Foreign Currency. [...]

[...] Under the ECB guidelines, external commercial borrowing refers to: Debt bonds bonds including Foreign Currency Convertible Bonds (FCCBs), Floating Rate Note (FRNs) Loans Supplier Credit Buyers Credit The government of India as a source of finance permits ECBs for Indian corporate for funding expansion of capacity as well as fresh ventures. Corporate can raise Foreign Currency from international lenders under the automatic route up-to 50 million USD. ECBs may be raised from any internationally recognized source such as banks, export credits, agencies, suppliers of equipment, foreign collaborators, foreign equity holders, international capital markets etc. [...]