RBI swap opens offshore funding for state lenders

LOWER COST ACCESS | Cheaper hedging accelerates global borrowing momentum 

Informist

New Delhi

The Reserve Bank of India's (RBI) concessional dollar-rupee swap facility will likely increase external commercial borrowings (ECB) by public sector undertakings (PSUs) and improve their funding costs, S&P Global Ratings said on Thursday.

"We expect loan growth for financial government-regulated entities to stay at about 15% per annum over the next two years, aided by mandates to drive the development of strategic sectors," Deepali Seth-Chhabria, a credit analyst at the ratings firm, said in a note.

In June, RBI Governor Sanjay Malhotra announced a concessional dollar-rupee swap for overseas borrowing to boost forex inflows and support the domestic currency. The central bank introduced the facility for ECBs with maturities of three years or more, and for overseas foreign currency borrowings raised by authorised dealer category-I banks with a minimum maturity of three years.

According to an Informist Poll, the facility is expected to push overall overseas borrowing to $65 billion in 2026-27 (April-March).

The report noted that regulations for government-owned non-bank financial companies (NBFCs) are gradually converging with the private sector. New classification guidelines allow large government-owned NBFCs to be considered part of the upper layer category. "This shift subjects them to stricter regulation and supervision, particularly regarding concentration limits. While current exposures may be grandfathered, the new rules will effectively curb incremental concentration risk and enhance credit discipline," the report stated.

Macroeconomic headwinds, loan seasoning, dwindling recoveries, and tapering provision buffers are likely to drive a slight increase in credit costs over the next two years, Geeta Chugh, an analyst at S&P Global Ratings, said. "Asset quality is a mixed bag. Some non-bank financial institutions are exposed to weak borrowers, though sovereign exposure and guarantees from the government partially mitigate the risk," Chugh added. Credit costs for the sector have improved and remain better than peers, the report noted.

Earnings of development financial institutions such as the Small Industries Development Bank of India, the National Bank for Agriculture and Rural Development, and the National Housing Bank are moderate. Similar trends were observed for the Indian Railway Finance Corp. and the Export-Import Bank of India.

"These entities tend to have weak margins despite their lower cost of funding," the report said. "Margins are constrained by the entities' policy roles. Some operate on a cost-plus basis while others have a cap on lending margins for the refinance business." Conversely, the Power Finance Corp., the Housing and Urban Development Corp. Ltd., and the Indian Renewable Energy Development Agency Ltd. generate higher margins as they lend to relatively weaker borrowers.