Roll-over of dollar loans curbed

Banks are putting curbs on rolling over short-term dollar-denominated loans because of a shortage of the greenback.

Dollar-denominated loans are disbursed from deposits under the foreign currency non-resident (banks) -- FCNR(B) -- scheme. Demand for these loans has increased substantially because of the interest rate advantage they offer and the rupee's rise against the dollar.

The outstanding FCNR(B) kitty of banks was worth $10.24 billion in February 2002. It has expanded since, with a steady flow of non-resident Indian money. However, banks have almost exhausted their FCNR(B) funds by disbursing them to companies.

According to bankers, loans coming up for maturity are either being redeemed or getting rolled over for a maturity shorter than their original tenors.

Dollar loans are usually lent for a period of six months to one year. The roll-over period will be shortened to three months or less.

Even in instances where loans are rolled over, part of the amount is being paid in dollars and the rest in rupees.

Bankers said this trend followed the shortage of dollars, and was a prudent step towards risk management and matching the supply and demand for dollars.

in a volatile exchange rate scenario.

"Although the rupee is still undervalued on a trade-weight basis and technically there is scope for appreciation, nobody is sure how long the bullishness will continue. Ideally, foreign loans should have a forward cover to hedge the risk," a banker pointed out.

However, most corporates see things differently. They say banks are not rolling over loans also because of the interest rate benefit accruing to them while lending in rupees rather than dollars under the FCNR(B).

This is because most banks enter into a sell-buy swap, where dollars are sold forward for rupee funds only to be bought back later. The total cost, including hedging, works out to around 2.5-3 per cent. In contrast, the cost of inter-bank rupee funds is around 5 per cent.

A cautious step