Lenders eye India as it relaxes overseas borrowing rules

Bankers are sizing up India lending opportunities in the wake of new rules announced last Thursday which allow India borrowers greater access to overseas borrowings and, for the first time, yuan debt.

Indian companies are now allowed to borrow up to USD 750 million -- previously USD 500 million -- in external commercial borrowings (ECBs) each financial year without approval, refinance rupee debt with overseas borrowings, and collectively borrow USD 1 billion in yuan.

There is an overall overseas borrowing cap of USD 30 billion per year. ECBs were previously permitted in US dollars, euros, pounds and yen.

The moves come, according to one India-focused loans banker at an international bank, as many Indian companies -- particularly in the fast-growing Indian infrastructure space -- are in "desperate need of funds", as domestic borrowing rates have reached a multi-year high and US dollar liquidity has tightened in recent months.

The changes will essentially "encourage companies to grow by allowing them to borrow at cheaper rates", said a loans banker at an Indian bank.

The types of lenders expected to expand their role in India offshore loan markets include certain Chinese banks, India-focused international lenders, and Indian banks with an offshore presence. Meanwhile, the introduction of yuan debt may also support Chinese imports into Asia's third-largest economy.

Potential offshore refi bond

The changes concerning the refinancing of rupee debt with overseas borrowings are a "significant move" expected to have a "big impact", said a Mumbai-based loans banker at an international bank.

Indian banks with a large overseas presence will be able to shift assets "from their domestic books to offshore books", the banker added.

Last year, rupee loans grew significantly, driven by project financings, and totalled over USD 60 billion-equivalent, while foreign currency loan volume amounted to about USD 22 billion. Both figures were higher than the USD 40 billion-equivalent in domestic loans and USD 7bn in offshore loans completed in 2009, according to Thomson Reuters LPC data.

Onshore borrowing has become increasingly expensive, with the Reserve Bank of India increasing the repo rate by 25 basis points to 8.25% last Friday -- the 12th such raise in 18 months.

"More corporates will look at the dollar market and approach foreign banks," said a loans banker at another Indian bank. But while international banks generally lend to high-grade corporates, Indian banks "work across the risk spectrum", the banker added.

China eyes India business

While Chinese banks have faced tighter lending restrictions at home, some have recently shown increased interest in lending to Indian borrowers in the telecommunications and energy sectors.

Reliance Communications Ltd, India's second-biggest mobile phone carrier by subscribers, got Rs 87 billion (USD 1.93 billion) in 10-year loans from China Development Bank in March to refinance 3G spectrum fees and to import telecom equipment from Chinese vendors Huawei and ZTE.

Bank of China recently committed USD 200 million to an around USD 3 billion syndicated loan backing Vedanta Resources Plc's acquisition of a 40% stake in Cairn India Ltd, described by one loans banker as "a big step forward" in relationship building with Indian credits.

"Fundamentally, Chinese banks want to increase lending to g to Indian borrowers," said an India-focused loans banker at a European bank.

Industrial & Commercial Bank of China (ICBC), the world's largest bank by market value, recently opened its first Mumbai branch.

Step forward

The Indian move to allow yuan debt is a "real step forward in the internationalisation of the Rmb currency" said an India-focused loans banker at a European bank.

The investor base for Indian borrowers raising Rmb-denominated debt could be similar to that for offshore Rmb bonds, said an India-focused loans banker at a European bank.

The Rmb-denominated "dim sum" bond market has grown quickly since China lifted a range of restrictions on the use of its currency last year.

Dim sum bonds totalling Rmb 83 billion have launched in 2011 to date, compared to the Rmb 42.6 billion for the whole of 2010, Thomson Reuters data shows. Offshore syndicated Rmb loans, however, have been slower to take off due to the lack of a suitable benchmark lending rate.

Hong Kong has become a major centre for offshore Rmb business. Deposits hit Rmb 553.6 billion in June, according to the Hong Kong Monetary Authority.

State Bank of India, India's largest commercial bank, became the first Indian bank to enter the yuan business in China when it opened a branch in Shanghai last year.

Banks expect to see more action in bonds rather than the loan market, citing the paucity of offshore Rmb syndicated loans to date.

Indian infrastructure and finance company Infrastructure Leasing & Financial Services Ltd (ILFS) looks set to be the first company to issue an Indian yuan-denominated bond. Reuters reported in August that the company had chosen three banks to handle the USD 200m-equivalent deal.