Thursday, November 15, 2012

COMPANIES SEEK RBI HELP TO CUT DOLLAR LOAN COSTS

Banks and corporate are hopeful that the Reserve Bank of India (RBI) 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. 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 (ECB).

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