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Banks begin to tap dollar loans under concessional swap programme

By Archana Narayanan

MUMBAI (Reuters) - Banks have begun tapping a new concessional swap facility for overseas fundraising, one of a spate of measures the Reserve Bank of India (RBI) has taken to attract offshore funds to support the battered rupee.

Under the programme launched on September 10, Indian banks can borrow overseas up to 100 percent of their Tier 1 capital level, although any loan over 50 percent of that level must be for a minimum 3 years - a duration some bankers said may deter overseas lenders.

Mid-sized Union Bank of India (NSI:UNIONBANK.NS - News) has raised $50 million overseas under the programme and plans to raise up to $500 million, said K. Subrahmanyam, its executive director.

Bankers said the total pipeline of such loans is likely to reach around $5 billion, providing a cushion for the rupee and reviving what had been a moribund market for overseas borrowing by Indian banks this year.

The rupee has weakened by about 13 percent against the U.S. dollar this year.

The concessional swap rate offered by the RBI of 100 basis points below the market rate would enable banks to save up to 300 basis points on their funding costs compared with the cost domestically.

The $500 million that Union Bank is looking to raise would be for 2 and 3 years and cost about 8.5 to 9 percent, including the swap cost, Subrahmanyam said.

By comparison, a 1-year bank certificate of deposit in India has an interest rate of 10.30 percent.

HDFC Bank (NSI:HDFCBANK.NS - News), Indian Overseas Bank (NSI:IOB.NS - News), IDBI Bank (NSI:IDBI.NS - News) and Yes Bank (NSI:YESBANK.NS - News) said they are looking to raise overseas loans under the programme.

"This is a pricing arbitrage opportunity for Indian banks to raise cheap capital in the international markets," said one banker in Singapore.

Yes Bank this week closed a $255 million dual currency syndicated loan facility, which was arranged before the RBI implemented its programme. It said it has approached the central bank to use the concessional swap facility.

Indian banks typically borrow in tenors of one to three years in offshore loan markets. For longer maturities, Indian banks resort to overseas bond markets, which also offer bigger sizes.

In 2013, only three Indian banks tapped the offshore loan markets, raising a combined $270 million before the new swap facility was implemented, according to Thomson Reuters LPC data.

The requirement for a three-year minimum maturity for offshore borrowing above 50 percent of Tier 1 capital "is causing difficulty because overseas lenders are more willing to lend for a year than for a longer duration," said Mohan Shenoi, head of treasury at Kotak Mahindra Bank, which aims to raise $500 million to $600 million under the facility.

(Additional reporting by Swati Pandey and Prakash Chakravarti in Hong Kong; Editing by Richard Borsuk)