ICICI to raise record $1-bn yen funds

MUMBAI: ICICI Bank will raise $1bn through yen borrowings to fund its lending operations. The bank expects to bring down its cost of funds by availing of Japanese interest rates. The funds would be raised over the next one to three years. The loan denominated in yen will be raised in more than three tranches, and will be swapped into rupees.

Fourteen banks were hired by ICICI Bank to arrange this loan, including players like Calyon, BNP Paribas, HSBC Holdings and French player Natexis Banques Populaires, sources said. Japanese rates are the lowest in the world. The three-month yen Libor is 0.4931% as against 5.3706% on dollar Libor.

However, high volatility of the yen makes hedging of Japanese loans against currency risks very expensive. But banks still choose the Japanese market because withholding tax on Japanese loans is only marginal because the tax is computed on interest payout. Thus, while withholding tax increases the cost of a dollar loan by 75 basis points on a yen-denominated loan, the withholding tax works out to only 15 basis points in the total borrowing cost.

Recently, HDFC Bank and Union Bank had also tapped the yen route to raise funds. Also, corporates such as Jindal Steel and United Phosphorous have raised loans in the yen. ICICI Bank may use the loan proceeds to lend to these borrowers. Senior treasury officials believe that this is also an attempt made by the bank to cultivate a new investor base in the Japanese market.

Industry sources informed that up to 15% of bank’s total balance sheet is denominated by foreign currency earnings. Apart from using the loan proceeds to fund its lending operations, the bank could also deploy these funds towards repayments of certain high-cost borrowings, sources added.

Net customer assets of ICICI Bank have risen by 47% to Rs 1,63,785 crore in September ‘06 as against Rs 1,11,514 crore, a year ago. By end-September ‘06, bank’s total retail disbursements for the year stood at Rs 33,500 crore, including home loan disbursements worth Rs 13,400 crore.

Going forward, the bank has disclosed plans to focus on non-fund-based products and services as well as capitalising on opportunities presented by the domestic and international expansion of Indian companies. The bank is extremely bullish on expanding its overseas operations, apart from extending its reach in the small and medium enterprises segment and rural lending.