With the Reserve Bank of India doubling the overseas borrowing limit of banks, Union Bank of India is planning to raise about $500 million, according to a top bank official.
The overseas borrowing will be in the form of bilateral loans of one to two year duration. The public sector bank will raise the resources from one of the two international locations — Hong Kong or Dubai, where it has branches.
The bank expects to tie up the funds at a mark-up of less than 2 percentage points over the benchmark Libor (London Interbank Offered Rate).
“But then if you add the swap cost of about 6.5-7.0 per cent, the overall borrowing cost might come to about 8.5-9.0 per cent. This is cheaper than the rupee deposits which we are raising today,” said K. Subrahmanyam, Executive Director, Union Bank of India.
A swap transaction entails the exchange of principal and interest in one currency for the same in another currency with a counterparty.
The bank can put the resources raised to two uses — it can covert them into rupees for domestic lending and also extend pre-shipment credit in foreign currency to exporters, said Subrahmanyam.