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'Speed is key' to raising funds abroad
IDBI Bank is in the midst of updating its medium term note (MTN) programme for raising funds from overseas markets. The financial institution has exhausted its earlier MTN limit of $1.5 billion. Underneath the updated programme,[link widoczny dla zalogowanych], the general public sector bank will raise $3.5 billion over the years to come to give loan to India Inc.
The bank is no stranger to raising resources overseas,[link widoczny dla zalogowanych],[link widoczny dla zalogowanych], says Melwyn Rego, Executive Director. In its earlier avatar like a development financial institution (prior to 2004), it had tapped funds in the overseas markets to aid the.
In an interview with Business Line, Rego observed that in international markets speed is of essence in raising resources because the markets are very volatile.
The financial institution has diversified sources of funding in order to mitigate the risk and spread the repayment tenor. Like a development finance institution we raised money from every possible source of finance. That trend is continuing even after we have converted into a commercial bank,[link widoczny dla zalogowanych].
We started off by tapping multilateral agencies such as the Asian Development Bank (ADB) and the Nordic Investment Bank. We have also accessed Export Credit Agency-backed credit lines. This has been from Hermes (Germany), Export Import Bank of the US, and Export Import Bank of Japan (now called JBIC), among others. Additionally, we now have tapped the financial institution markets through bilateral loans, club loans and syndicated loans.
We have also accessed the text markets through 144A in the US; REG S (for raising dollars outside the US),[link widoczny dla zalogowanych], and also the Samurai bonds (Japan). We made three bond issuances in Germany before the formation from the Euro,[link widoczny dla zalogowanych], two Swiss Franc bond issues,[link widoczny dla zalogowanych], the first Dimsum bond issue in Hong Kong and the first Singapore dollar bond issue by an Indian financial entity.
Rationale for raising money from diverse sources
Diversifying our source of funding is essential because there is a need to obviate the risks and restrictions associated with only one kind of funding.
For instance,[link widoczny dla zalogowanych], funds from multilateral sources are associated with a specific end-use. They often take a very long time, about two years,[link widoczny dla zalogowanych], to tie up. So if you want money immediately,[link widoczny dla zalogowanych], seeing a multilateral source may not satisfy the requirements.
The ECA-backed lines of credit are linked to imports from a particular country. They're straitjacketed in the sense that they have a particular grace period and a well defined repayment schedule. Often, when we give loan to our clients,[link widoczny dla zalogowanych], this rigid repayment schedule may not squeeze into their funds flows. However,[link widoczny dla zalogowanych], they come in a fairly cheap rate.
Bank markets,[link widoczny dla zalogowanych], however,[link widoczny dla zalogowanych], offer better pricing than bonds. However, after the 2008 crisis banks are reluctant to give loans in excess of three years. If you wish to raise $1 billion,[link widoczny dla zalogowanych], then bank markets are good. Bond finance industry is ideal for raising money up to $250 million.
Within the last twelve months,[link widoczny dla zalogowanych],[link widoczny dla zalogowanych],[link widoczny dla zalogowanych], the financial institution has raised about $1 billion from overseas bond issues in different geographies. Further, via a mixture of club loans and syndicated loans in the bank markets,[link widoczny dla zalogowanych], we have raised near to $730 million. The financial institution has exhausted its limit of $1.5 billion for raising resources with the medium term note (MTN) programme. Bonds issued under MTN are on the Singapore stock market. We're along the way of updating the MTN programme to $3.5 billion.
Foreign borrowings account for about 5 percent from the total deposits and borrowings (at about Rs 2.60-lakh crore) of the bank. In the next three years,[link widoczny dla zalogowanych], they will account for about 10 per cent of the total deposits and borrowings.
Because of the economic situation,[link widoczny dla zalogowanych],[link widoczny dla zalogowanych], the challenges in mobilising funds
Despite the downturn in the economy, the India story is still quite strong. The Indian economy has reached the trough and also the only way now's to obtain better.
We have a large domestic population, which creates good demand. We're well poised to make use of the demographic dividend. The ratio of dependent persons to every working body's coming down rapidly.
Large infrastructure requirement and strong retail demand will fuel growth in the Indian economy,[link widoczny dla zalogowanych].
Also,[link widoczny dla zalogowanych], there exists a well regulated banking sector. Reserve Bank of India does not permit structured products, exotic products or leveraged products. So, there exists a good, old-fashioned banking model. Hence, there is unlikely to become a situation in India when you are getting up one day to grasp that the bank lost $2 billion as a result of rogue trader.
Also,[link widoczny dla zalogowanych], within the international markets speed is essential since the markets are very volatile. Whenever we see a chance, we move really quickly. Time to take a choice and execute it's less than a week.
Future intends to raise funds overseas
Given the interest rate arbitrage, IDBI Bank continues to focus on tapping the overseas markets for funds. This will be deployed to meet the domestic and forex requirements in our Indian clients.
We intend to raise another $500 million by end of the fiscal. We are tapping new overseas markets that have not been tapped by an Indian issuer before.