Japan Bank for International Cooperation (JBIC) has signed an untied loan agreement totalling the equivalent in Japanese yen of up to US$200mn with ICICI Bank, India’s second largest commercial bank in terms of assets.
The loan was cofinanced with Japanese private financial institutions Sumitomo Mitsui Banking Corporation as agent bank), Bank of Tokyo-Mitsubishi UFJ, Mizuho Corporate Bank, Sumitomo Trust & Banking Co, and Sompo Japan Insurance, with JBIC providing guaranteed cover for the portion cofinanced by them.
The loan will provide funds, with ICICI acting as an intermediary, not only for local Japanese affiliates but also for the Indian companies from which domestic Japanese companies and local Japanese affiliates purchase raw materials parts and equipment.
The loan will thereby serve to upgrade the local supply chains of Japanese affiliates in India, expand their markets, and strengthen economic ties between Japan and India.
The local procurement ratio of Japanese affiliates operating in India is 61.8% (according to a Jetro study in fiscal 2004).
This is attributable to relatively higher tariffs and freight transport infrastructure, and a range of non-tariff barriers, including customs procedures that need further development. Another contributing factor often pointed out is the difficulty to procure sufficient raw materials and parts in terms of their quality and volume.
Financial support for fostering local supporting industries will be conducive to bolstering the international competitiveness of local Japanese companies.
This is the first untied loan JBIC has offered to an Indian private financial institution without a guarantee from the Indian government. JBIC thus provides credit by assuming the corporate risk of ICICI Bank. The loan aims to improve the business environment of Japanese companies in response to their rising expectations of India as a new location, following China, for business development.