Rupee-dollar currency risk has soared to about 8 to 9 per cent
C L Jose
KOCHI/November 16-2023: Large non-banking finance companies (NBFCs) have substantially ramped up their bank credits as the price of overseas borrowing turned pricey due to the increased hedging cost involved in dollar borrowings.
Since the overseas borrowings are done in foreign currencies, the borrowers need to cover the exchange risk in order to be on the safer side at the time of the loan repayment, and this is done through hedging the exchange risk, which involves a cost.
According to banking sources, cost of hedging rupee-dollar currency risk has soared to about 8 to 9 per cent taking the cost of borrowing in dollar to around 12 to 13 per cent which is unheard of in the recent past.
The global uncertainties has pushed up the cost of hedging and this rate is bound to stay as long as the uncertainties exist. At the same time, bank finance is available for better rated companies at around 8 to 9 per cent.
The bank funding on the one hand comes relatively less-priced, and on the other, can be availed for long term thus adding more comfort to the company in terms of asset-liability management (ALM).
In the case of Manappuram Finance, while the total borrowings as of September end amount to Rs32,237.2 crore, Rs8873.2 crore is Working Capital Demand Loan (WCDL) and cash credit (CC) from banks and other financial institutions (FIs), whereas another Rs16,198.3 crore falls under terms loans from banks.
Together these fund facilities from banks constitute 77.7 per cent of the total borrowings of the company as of September end, 2023. A year ago, the borrowings from banks and financial institutions accounted for only 61.6 per cent of the total borrowings of Manappuram Finance.
In fact, the spike in the cost of hedging is the main reason for the high price of external borrowing, mostly done in dollar.
In the case of Muthoot Finance, the largest gold loan company in the country, the proportion of bank finance in the company’s stable source of funds has considerably increased in the past one year.
The statistics reveal that while the bank funding constituted 55.91 per cent of the total stable funding, which is at Rs46, 809.5 crore as of September end, 2022, borrowings from banks and financial institutions (FIs) went up to 65.36 per cent of the stable funds during the one-year period, as of September end, 2023.
It may not be right to conclude that the only reason for the uptick in bank funding for the gold loan companies is the high rate of overseas borrowing because the overseas borrowing or overseas bond is just one of the components of their stable funding sources.
“Bank funding gives greater comfort in the asset liability management (ALM) of the company as these can be availed for long term. On the other hand, commercial paper (CP) remains another source of funding whose tenure is less than a year,” VP Nandakumar, the MD and CEO of Manappuram Finance told myfinpoint.
There has been a growing hesitation, of late, among the NBFCs, especially gold loan companies, to raise funds through the issue of non-convertible debentures (NCDs) due to the price differential as well as the processes involved in the issue of NCDs.
“If we compare the effective pricing of issuing NCDs, it’s slightly higher than that charged by the banks, more so due to the cost involved in the issue of NCDs,” Manappuram MD added.
