RBI’s Concessional Swap Facility To Boost Financial Institutions’ Overseas Borrowing: S&P

New Delhi, Jul 2 (PTI): The concessional swap facility introduced by the Reserve Bank of India (RBI) is expected to lower funding costs for several government-owned financial institutions, prompting them to increase their external borrowings, according to S&P Global Ratings.

To boost foreign capital inflows, the RBI last month announced a concessional forex swap facility to encourage public sector undertakings (PSUs) to raise external commercial borrowings (ECBs) until September 30. Under the scheme, the central bank will offer a concessional premium of 1.5 per cent per annum on fixed US dollar-Indian rupee swaps for a tenure of three to five years for ECBs raised by public sector companies.

S&P said the new concessional swap agreement offered by the RBI eliminates currency risk at a much lower cost than prevailing market rates. This is expected to reduce funding costs for many government-owned financial institutions, making overseas borrowings more attractive.

In its report titled ‘Indian Government-owned Financial Institutions: The RBI Swap Effect Will Increase Offshore Activity’, S&P said government linkages provide these entities with financial flexibility, access to cheaper funding, and a mechanism for asset quality support.

S&P Global Ratings analyst Geeta Chugh said incentivising overseas borrowings by government-owned financial institutions would help attract foreign exchange, strengthen India’s reserves and support the rupee. “… channeling this international capital through institutional lenders creates a powerful credit multiplier effect across the Indian economy,” Chugh said.

Financial services is one of the four strategic sectors in India, and government-related entities (GREs) operating in this space are more likely to receive government support, particularly those performing policy-related roles.

GREs in the financial sector include PFC, REC, IRFC, NABARD, NHB, EXIM, HUDCO, SIDBI, IREDA and NaBFID. S&P noted that these institutions benefit from government backing through financial flexibility, lower-cost funding and support for maintaining asset quality. It added that government-owned entities dominate India’s financial sector, with many non-bank GREs operating in areas of national importance.

“We expect loan growth for financial GREs to stay at about 15 per cent per year over the next two years, aided by mandates to drive the development of strategic sectors,” S&P Global Ratings credit analyst Deepali Seth-Chhabria said.

(Disclaimer: Except for the headline, this article has not been edited by HDFC Sky editorial team and is auto-generated from PTI feed.)