Banks scramble for foreign loans after FCNR deluge

Alongside its FCNR(B) announcement on 5 June, the RBI also introduced a swap facility for external commercial borrowings (ECBs) raised by public-sector companies and overseas foreign-currency borrowings (OFCBs) raised by banks. Under the facility, banks can sell US dollars to the central bank and agree to buy them back at the end of the swap period.

Unlike the FCNR(B) scheme, under which the RBI bears the full hedging cost, the ECB/OFCB facility provides a 1.5% annual subsidy toward the cost of hedging foreign-currency funding. The cost of hedging OFCB exposure is generally about 3.5% to 4%, giving banks a benefit of roughly 200 to 250 basis points on incremental OFCB borrowings.