India Inc takes a fancy to yen-denominated loans
According to the latest external debt numbers released by the finance ministry, the share of yen-denominated debt has grown 45% between end-June 2008 and end-December 2008 from $25.3 bn to $36.7 bn.
By Gayatri Nayak, ET Bureau |
MUMBAI: Yen-denominated loans have emerged as the preferred form of borrowing for India Inc. According to the latest external debt numbers released by the finance ministry, the share of yen-denominated debt has grown 45% between end-June 2008 and end-December 2008 from $25.3 bn to $36.7 bn. Following this increase, the share of yen debt has risen from 11.3% to 15.9%.
Bankers attribute this to the yen funding being the cheapest in the international financial markets, among all major currencies, during the period. Moreover, Mecklai Financial senior vice-president C Chandrashekhar points that the borrower back home has to pay a lower withholding tax of 10% compared with about 20% on the dollar borrowings. Also, the yen borrowing was cheaper then, as the libor (London inter-bank offered rate) linked rates were the lowest in yen, he added.
There have also been instances of borrowers swapping dollar debt with the yen. But bankers say much of the yen borrowings are short-tenured or rolled over for very short interval depending on the outlook for the currency. This is because the yen is more volatile, among currencies, in the special drawing rights (SDR) ��� a currency with the
International Monetary Fund ��� basket, which also comprise the reserve currencies.
A part of the rise in share could be due to the revaluation impact, as the yen has gained almost 15% against the dollar. The external debt numbers expressed in dollars could hence show a higher number for yen debt. Basix Forex director KN Dey, a firm advising companies on their forex needs, said the poor outlook on the yen could also have a role to play in the rise. ���If a corporate���s prediction, that the yen would weaken, comes true, he may have to shell out lesser units while repaying a loan,��� he said.
The yen, after rising from 110 against the dollar to 90 a few months back, has been steadily losing ground. It was trading at 99 per dollar on Thursday. Going forward, however, foreign currency consultants are cautious on advising corporates to go for yen-denominated loans, especially for long-term projects.
Bankers attribute this to the yen funding being the cheapest in the international financial markets, among all major currencies, during the period. Moreover, Mecklai Financial senior vice-president C Chandrashekhar points that the borrower back home has to pay a lower withholding tax of 10% compared with about 20% on the dollar borrowings. Also, the yen borrowing was cheaper then, as the libor (London inter-bank offered rate) linked rates were the lowest in yen, he added.
There have also been instances of borrowers swapping dollar debt with the yen. But bankers say much of the yen borrowings are short-tenured or rolled over for very short interval depending on the outlook for the currency. This is because the yen is more volatile, among currencies, in the special drawing rights (SDR) ��� a currency with the
International Monetary Fund ��� basket, which also comprise the reserve currencies.
A part of the rise in share could be due to the revaluation impact, as the yen has gained almost 15% against the dollar. The external debt numbers expressed in dollars could hence show a higher number for yen debt. Basix Forex director KN Dey, a firm advising companies on their forex needs, said the poor outlook on the yen could also have a role to play in the rise. ���If a corporate���s prediction, that the yen would weaken, comes true, he may have to shell out lesser units while repaying a loan,��� he said.
The yen, after rising from 110 against the dollar to 90 a few months back, has been steadily losing ground. It was trading at 99 per dollar on Thursday. Going forward, however, foreign currency consultants are cautious on advising corporates to go for yen-denominated loans, especially for long-term projects.
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���The yen is a very volatile currency and we are not advising our clients to go for the yen loans, especially for project finance,��� said Mr Chandrashekhar. The dollar still continues to be the stable currency and everybody will continue to vouch for it for some time. It still accounts for more than half (53%) of the country���s external debt, though its share has slipped for some time.Download
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