Borrowing costs may rise as overseas lenders turn cautious post PNB fraud
MUMBAI: Punjab National Bank’s (PNB) ₹11,400 crore fraud case is likely to alter the dynamics of the trade finance market with borrowing costs likely to increase in the short-term as overseas lenders turn cautious about accepting bank guarantees issued by state-owned lenders.
“When you have such a big event, I would be surprised if banks are not cautious, in terms of lending to a particular sector or even re-looking at the existing lines,” said a senior official from a foreign bank on condition of anonymity.
“It is not to say that people are shutting businesses. There will be short-term impact as banks become strict in approving buyers’ credit, possibly leading to drying-up of dollar funding to borrowers or spike in rates. However, as things settle down, we may see a lot more robust system,” the person added.
The term buyers’ credit refers to loans for payments for imports into India, arranged from overseas banks, including foreign branches of Indian banks. These loans are arranged by a borrower, who is also the importer, with the help of domestic banks. Here, since the importer needs dollar finance, domestic banks issue guarantees such as letters of undertaking (LoU) against which the overseas banks provide credit. Domestic banks charge a fee for issuing LoUs, which is determined based on its capital position, access to dollar liquidity and the borrower’s risk profile. Currently, the fee ranges between 50 and 200 basis points on average. According to Sajal Gupta, head forex and rates, Edelweiss Securities Ltd, currently importers can avail of short-term buyers’ credit of up to a year at 8% annualised on a full hedged basis.
“Our conversations with importers reveal that there is at least 20-40 basis points jump in borrowing cost since the fraud broke out. In certain cases, the time for approval of limits and availing is taking more time than usual. Gems and jewellery sector is most hit. Also, a few banks have issued internal circulars to be cautious on any LoU-based funding,” he said.
Buyers’ credit is priced at spread, usually starting at least 50 bps in most cases, over the London Interbank Offered Rate.