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IFC to extend Re loans to boost business

Freny Patel

The International Finance Corporation will extend rupee credit to Indian companies without any foreign exchange risk in an effort to provide a boost to its funding in the country.

"Indian corporates do not want to take any foreign exchange risk, and by offering rupee loans through currency swap facilities with local counterparts, we hope this will give a dramatic boost to our business," said a senior official at IFC.

India is the first country where IFC has extended local currency loans following its signing an agreement with the Indian government, and local banking counterparts -- including State Bank of India and other foreign banks -- for providing currency swap facilities.

The facility would enable the private sector lending arm of the World Bank to provide local currency finance products to Indian borrowers without any foreign currency risk. The facility is expected to make IFC more responsive to the needs of its clients and would also strengthen its ability to provide rupee credit.

IFC is keen to extend local currency loans in other emerging markets including China, South Africa, Poland and Russia.

However, much depends upon the ability of local banks to offer currency swap facilities. India is among the few emerging countries where banks have long-term foreign currency assets of at least 10-year duration, against which they can offer IFC currency swap facilities and completely hedge the exchange risk.

IFC prefers to deal with strong institutions, which have the treasury and technical ability to do currency swaps. In most emerging countries, local banks including foreign banks operating there have short-term foreign currency assets of just 3-5 years duration, said officials. This include China.

Against the dollars extended by IFC, local banks give the multilateral agency rupee funding and hedge their foreign exchange exposure through the long-term foreign currency assets.

The first local currency loan extended by IFC in the world was to Sundaram Home Finance for Rs 500 million last week.

Senior IFC officials told Business Standard that many corporates do not want to take foreign exchange risks as they are not exporters.

Hence, they cannot hedge against the depreciation in the rupee. IFC anticipates that its local funding will drop in the current year ending June 2002 to the region of $300 million, down from $500 million last year.

"Much depends upon a few large deals and whether these come through in the current year," said the IFC official.

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