European banks such as BNP, RBS, Credit Agricole put forex loans to Indian firms on sale

MUMBAI: Several high-street European banks have hit the market in the past few weeks to sell some of their foreign currency loans to Indian firms as these lenders focus on preserving capital in the midst of a sovereign debt crisis.

BNP, RBS, Credit Agricole and Societe Generale are among the lenders that are believed to be looking for buyers for these assets. A few large Indian banks with offshore offices may be interested, provided they have adequate dollar liquidity, said bankers.
As most of these loans were given to Indian companies with good credit record, and some with top-notch ratings, it may be a buying opportunity for asset managers and large Asian banks.

“Portfolios comprising loans to companies such as Bharti, HPCL, Vedanta, JSW and Amtek Auto are in the market. These are good assets and there are more. If the pricing is attractive, we are interested,” said a senior official of a large Indian bank.

Asset buyers will fish for discounts to protect yields on these loans which carry lower coupons as they were given when the interest rate regime was benign.

European banks, particularly some French lenders, have to recapitalise themselves, which can be done either through new capital or shrinking asset books. Since raising equity in a turbulent market is tough and European officials are discouraging financial institutions from cutting loans to European borrowers, parts of Indian and Korean assets are being put on the block.

“This trend may continue to haunt many Asian companies for the next few months. Incremental loan syndications can be more and more difficult. While Japanese banks and a few Mid-East banks are stepping in to lend, they are unlikely to fill the gap caused by European banks,” said the person. According to him, asset managers and hedge funds may look at buying some of these loan, bond and structured assets.

The European banks mentioned here confirmed the development. The RBS spokesperson said: “The bank continually engages in primary and secondary buying and selling of all types of assets (including foreign currency loans) as part of business as usual activities.” A spokesperson for BNP said the bank does not want to comment.

Foreign Loans Get Expensive

The Credit Agricole spokesperson did not respond to ET’s query, while SocGen officials could not be contacted.

Borrowing in the overseas market has become more expensive for local companies as well banks. For a five-year loan, an Indian company will have to pay 450-500 basis points above the-London Inter-bank Offered Rate, against a spread of 250 basis points a year ago. For companies with lower ratings, the mark-up could be as high as 650-700 basis points.

What has added to borrowing costs is a squeeze in liquidity as investors, companies and banks stack up dollars amid uncertainty and fear of sovereign defaults.

“The liquidity situation is not as bad as in 2008 when the RBI had to open a dollar window to ensure foreign branches of Indian banks did not face a crunch. But there have been occasions in the past four months when banks generated dollar liquidity through swap deals,” said a treasurer with a domestic bank.

In such transactions, banks buy dollars in the spot market and simultaneously sell the US currency forward and keep on repeating it to tide over a possible crunch.