The largest consumer finance company Bajaj Finance Ltd has tapped the US market for external commercial borrowings of around Rs 750 crore for a three-year period. The move to raise global money not only diversifies the liabilities mix in the balance sheet but also reduces the cost of funds. But there are risks from currency fluctuations.
At a time when the domestic lenders are risk averse and the non-banking finance companies (NBFCs) are facing higher loan stress and provisioning pressure because of lockdown, the ECB route is a good option as interest rates globally are at near zero level. There are also indications of interest rates remaining low for a short to medium term because of recessionary condition post the pandemic.
The borrowing has been done at a LIBOR-plus margin. The London interbank offered rate (LIBOR) is a benchmark rate for banks and other lenders for fixing the short-term interest rates for borrowers. The current LIBOR rate is around 0.33 per cent. The margin for this facility is 0.95 per cent. But if one adds the hedging and other costs, the interest rate comes out to be 100-150 basis points cheaper than the domestic bank funding.
Currently, the major sources of funding are banks, debentures and fixed deposits. The company has banks channel open because of better credit rating. The fixed deposit route is slightly expensive as people prefer bank deposits over company deposits or deposit in NBFCs.
The housing major HDFC Ltd is quite successful in raising low-cost foreign funds. In fact , HDFC Ltd has also raised masala bond in the global markets. Two years ago, it raised Rs 500 crore masala bonds at 8.75 per cent for a five-year period. The interest rates were higher at that time.
Bajaj Finance with assets under management of Rs 1.37 lakh crore is currently sitting on liquidity buffers of Rs 20,000 crore-plus. The slowdown in the economy and the impact of the pandemic have created new uncertainties in the market. The company had earlier offered six-month moratorium to customers who were finding it difficult to repay loan.
The fund-raising through the ECB is a good move to protect the margins by reducing cost of funds.
The company is well-capitalised with capital adequacy ratio of 26 per cent-plus. In November last year, the company had raised Rs 8,500 crore through the QIP. In fact , there is no pressure on company to dilute the equity at current levels to raise capital. The company's stock has crashed from its 52-week high of Rs 4,923 per share to Rs 3,266 per share.