RBI’s concessional swap facility to boost overseas borrowing: S&P

RBI announced opening of concessional forex swap facility to BOOST PSUs to raise external commercial borrowings

The concessional swap facility provided by the RBI would lower funding costs for many government-owned financial institutions that are now likely to increase their external borrowings, S&P Global Ratings said on Thursday.

To shore up foreign capital inflow, last month, the Reserve Bank had announced the opening of a concessional forex swap facility to encourage PSUs to raise external commercial borrowings (ECBs) until September 30. Under this, RBI will offer a concessional 1.5 per cent per annum premium on fixed US dollar-Indian rupee swaps for 3-5 years for the ECBs raised by public sector companies. S&P said the swap agreement eliminates currency risk at a much lower cost than the market.

S&P said the new concessional swap agreement offered by the Reserve Bank of India eliminates currency risk at a much lower cost than the market. This should benefit funding costs for many government-owned financial institutions that are now likely to increase their external borrowings.

In a report titled ‘Indian Government-owned financial institutions: The RBI swap effect will increase offshore activity’, S&P said government linkages provide financial flexibility, access to cheaper funding, and a mechanism for asset quality support for these entities. S&P Global Ratings analyst Geeta Chugh said incentivising overseas borrowings by government-owned financial institutions draws in foreign exchange to bolster reserves and support the rupee. “... channeling this international capital through institutional lenders creates a powerful credit multiplier effect across the Indian economy,” said Chugh. Financial services is one of four strategic sectors in India. As such, government-related entities (GREs) in the sector are more likely to benefit from government support. This is particularly so for those that play policy roles. GREs in the financial sector include PFC, REC, IRFC, NABARD, NHB, EXIM, HUDCO, SIDBI, IREDA and NaBFID.

S&P said government linkages provide financial flexibility, access to cheaper funding, and a mechanism for asset quality support.

GREs dominate the financial sector in India. Many nonbank GREs operate in segments that are of national interest. “We expect loan growth for financial GREs to stay at about 15 per cent per year over the next two years, aided by mandates to drive the development of strategic sectors,” S&P Global Ratings credit analyst Deepali Seth-Chhabria said.