No discussion on Real Estate is complete without major focus on sources of funding for the sector. It is quite natural since Real Estate sector needs huge funds and has the potential to generate huge funds. There have been many innovative sources of funding options that have been explored in the past and one such funding innovation is Masala Bonds. This article discusses briefly about the Masala Bonds and highlights the sensitive aspects involved therein.
Even most expensive foreign currency loans are considered to be cheaper than rupee loans if the views and preferences of Indian Companies are any indication. If this is so, what would have been limiting Indian borrowers from mobilizing foreign currency loans rather than availing the relatively expensive rupee loans and more particularly in India which is short of capital funds? It is because, while absolute foreign currency loans could be convincingly cheaper than rupee loans, whether the all-in-cost interest rate of a foreign currency loan is cheaper than rupee loan will be known only after the related costs viz., hedging, consultants costs, incremental transaction costs, etc. are also considered.
The costs of ECB can be handled, absorbed, or managed only by borrowers who have foreign currency earnings, larger scale of borrowings, networked access to foreign lenders, etc but not by all the needy borrowers. This explains that while the source of external commercial borrowings (ECB) has been in existence since 1970s and gained popularity since 1991, even now, ECB remained as a source only to a select stratum of companies but not to all the needy borrowers. Further, since ECB involves considerable foreign exchange costs for periodical payments of interest and principal installments, there is a relatively higher level of regulation on ECB loans. The regulation and the foreign exchange costs have been deterring many needy Indian companies from sufficiently mobilizing foreign currency loans.
With the advent of offshore rupee denominated debt termed as Masala Bonds in year 2013, the situation seems to have been changing for the good of the Indian borrowers and Indian economy. Masala bonds are debt instruments of Indian companies denominated in Indian rupees but issued outside India. These could be subscribed by non-resident Indians living in those other countries or locals of those countries (i.e., foreigners to India). Masala Bonds are very much ECBs except being denominated in Indian rupees while typical ECBs are denominated in the foreign currency. Since Masala Bonds are denominated in Indian rupees, issuers will not have any foreign exchange costs. Correspondingly, since the demand for foreign exchange will not increase, the Indian rupee and economy will not have much impact due to the ECB loans.
Till now, over 2 years period, about Rs. 10,000 crores have been mobilized in the form of Masala Bonds and another Rs. 5,000 crores is understood to have been in proposal or planning stages. Usually, the dollar denominated bonds issued by Indian companies carry about 4% interest rate. Since the domestic interest rates in US are about 1.50% to 2.50%, the spread of 1.50% to 2.50% attracts the investors to invest in USD denominated bonds. Since in case of Masala Bonds the currency risk is passed on by the issuer to the investor, the investor expects compensation for the currency risk as well which is over and above the base interest rate and credit risk premium. This is visible from the interest rates offered by various Masala Bonds’ issuers viz., IFCI, HDFC, Edelweiss etc., which ranged from 6.45% to 9.05%. The market trend appears to have been favourable for Masala Bonds going by the aspiring companies and the lined up issues.
However, the interesting aspect which should not be ignored is that whether foreign exchange loan or a rupee denominated loan, so long as the loan is from outside India, it is very much ECB and there could be either direct or indirect impact on the Indian rupee exchange rate. If it is a foreign currency denominated loan, Indian company is bearing the forex risk besides increasing demand for foreign currency. In case of Masala Bonds, although the foreign investors are bearing the forex risk but instead of Indian companies, the foreign investors will increase the demand for foreign currency. This is because Indian Rupee is not an international currency and any foreign investor will have to exchange Indian Rupees through Indian counters only.
In view of the above paradox and given the increasing popularity for Masala Bonds, it is imperative to broadly weigh the comparative costs and benefits for the borrowers and the Indian economy in case of typical ECBs (foreign currency denominated debt) and Masala Bonds. Considering this significance, it is imprudent to judge the superiority or inferiority of this innovative funding without computing the all-in-cost interest rates in both the cases for the borrowers and also without cost-benefit analysis for the Indian economy.
By – Dr.Kishore, Economist & Finance Professional
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