RBI Credit Line To Act As ‘Insurance’ For Exim Bank

In order to ensure that India’s Exim Bank does not run into dollar shortages, the Reserve Bank of India, last week, said it would extend a Rs 15,000 crore line of credit to the lender. The line of credit would be provided for a period of 90 days, with an ability to rollover the line up to a period of one year. This line of credit would enable Exim Bank to avail a U.S. dollar swap facility to meet its foreign exchange requirements, the RBI said.

An email sent to Exim Bank seeking details of the facility was not answered.

Why The RBI Stepped In

A bank official familiar with the development told BloombergQuint that it had requested the RBI for a swap facility as a backstop if the global macroeconomic environment deteriorates further over the next six to 12 months.

The bank is seeking clarity from the RBI in terms of whether the swap facility can be used in tranches or all at once. Clarity is also being sought on whether the swap facility will be available for both U.S. dollars and Indian rupees, this official said on the condition of anonymity.

The facility will ensure Exim Bank has adequate funding to meet any upcoming bond redemptions.

Data from Bloomberg shows that the bank has around Rs 6,400 crore in debt repayments coming up for maturity between June and September 2020. Further, it has a total of Rs 8,780 crore worth of liabilities due for repayment by the end of December this year and around Rs 13,350 crore by the end of March 2021, according to Bloomberg.

Most immediately, there is $500 million dollar bond repayment coming up in August. For this, funds are available with the bank, the person cited earlier said. The bank has enough funds to meet debt repayments beyond December as well, he said.

However, the bank may find it difficult to raise fresh funding in the offshore dollar bond market due to pricing of funds. In that scenario, the RBI-offered swap facility can act as an ‘insurance’, the person said.

On Jan. 6 this year, Exim Bank raised a 10-year dollar bond at a coupon rate of 3.25%. This translates to credit spread of 144 basis points over 10-year U.S. Treasuries. Since then, credit spreads on these bonds have nearly doubled in secondary market trades to 274 basis points as on May 27, Bloomberg data showed.

According to a senior debt banker, the Asian primary issuance market has been improving steadily over the last few weeks, with investors lapping up high-yield securities coming from investment grade countries like China and South Korea in particular. But local issuers would need to hedge the risk and this would make it costlier to raise funds overseas when compared to the local market, this banker said.

The banker also cautioned that a sovereign downgrade for India, should it happen, would make it even tougher for local firms to raise money overseas.

Loan Book Amid Downturn In Global Trade

Exim Bank is a state-owned financial institution that provides domestic importers and exporters with rupee loans and overseas export units with loans denominated in dollars. In return, it receives repayments from its domestic and overseas borrowers in the respective currencies. It also acts as an credit agency for the Government of India’s bilateral projects in foreign countries.

Of the bank’s Rs 1.07 lakh crore loan portfolio as of September 2019, 60.5% is related to export finance. Another 20.53% is in the form of term loans to exporters, 11.9% is overseas investment finance and 4.8% is import finance, according to a January 2020 presentation.

The bank’s gross non-performing asset ratio stood at 11.5% as on September 2019, which prompted the government to step in with capital for the lender.

Nearly 73% of the bank’s business is in foreign currency loans, with the remaining 27% in Indian rupee, the presentation said.

The bank may be facing asset quality challenges in terms of delayed repayments from existing borrowers, a credit rating analyst told BloombergQuint on condition of anonymity. In addition, the RBI-offered moratorium could also impact flow of repayments, this person added.

In a rating note dated April 20, India Ratings said that with the Covid-19-led lockdown and other counter measures, the bank may face some headwinds in its asset quality levels in the near-term as around 45% of its portfolio is eligible for a moratorium extension till May 2020.

For now though, only around 12% of the bank’s borrowers have taken up the offer of a moratorium, said the bank official cited earlier. However, the RBI has now extended the moratorium till end-August, giving borrowers the choice to defer payments.

India Ratings has retained its AAA rating on Exim Bank, with a stable outlook, owing to the sovereign backing enjoyed by the lender. Over 36% of Exim Bank’s portfolio is in the form of letters of credit, backed by government guarantees, which are virtually risk free. Furthermore, the credit risk on the refinance portfolio, accounting for 5.7% of the loan book, is on the corresponding bank, thereby reducing the overall risk for Exim Bank, the rating agency said.