Trade and export financiers are manoeuvring to catch the infrastructure and commodity wave driving the Indian economy, writes Kevin Godier.
After the global hiccups of late 2008 and early 2009, India’s GDP growth was back at 8% again by the third quarter of 2009, partly due to heavy government investment in public infrastructure.
New Delhi’s current five-year plan through to 2012 has earmarked US$500bn for projects ranging from telecommunications to energy and transportation systems. But the sheer weight of money required has seen an increasing quest for private sector participation, with the targeted private component moving to 36% in the current plan, and a potential 50% in the 2012-17 plan, under which infrastructure spending of US$1tn is proposed.
The rising call upon private money is being mirrored in the project finance market, according to Khawar Iqbal, director, project and export finance, in HSBC’s resources and energy group: “With the massive investments in infrastructure, the demand has been increasing very sharply – in fact during 2009, India was the largest project financed market with transactions of US$30bn concluded, up from US$19bn in 2008,” he points out.
HSBC is currently looking at large transactions in India’s power and telecom industries that are expected to be concluded during 2010, and Iqbal foresees that export credits will play a role in both these sectors, as well as in shipping, aviation and steel. He highlights a 10-year, US$260mn deal arranged by HSBC and concluded in September 2009 for Idea Cellular, one of the largest mobile operators in India, and backed by Finland’s Finnvera, to facilitate the purchase of equipment and services from Nokia Siemens Networks.
This structure is an example of the financing options that local companies can turn to for some of their capital expenditure financing needs. Despite the dominance of India’s very liquid domestic banks, Iqbal sees that “the larger and more mature corporates tend to use the international bank market selectively”.
For a few large corporates, domestic banks are reaching their single borrower exposure limits, but generally, Indian firms are more motivated by a need to diversify funding sources and seeking out price advantages.
The pattern was evident in January 2010, when the National Aviation Company of India (NACIL) tapped a US$1.1bn financing extended by JP Morgan Chase, and guaranteed by the Export-Import Bank of the US (US Ex-Im), for acquiring a series of Boeing aircraft to be operated by Air India and Air India Charters. The deal’s “competitive rates of interest as compared to commercial financing” were stressed by NACIL chairman and managing director Arvind Jadhav.
“India does not have the capacity to build solely with domestic players,” adds Peter Hall, vice-president and chief economist at Export Development Canada (EDC), which linked with US Ex-Im in 2009 to provide a US$750mn financing for Reliance Infocomm’s telecommunication network build out.
Trade finance opportunities
According to Nirvikar Jain, Mumbai-based vice-president, global trade and supply chain solutions at Bank of America Merrill Lynch (BAML), “India’s imports and exports are both going very robustly”, providing some massive opportunities for banks in the trade space.
Vasudevan M, head of trade finance, ICICI Bank UK, adds: “Indian exports appeared to have turned a corner in November, rising 18.2% to US$13.2bn after 13 months of decline.”
Where import trade takes place under letters of credit (LC), risk premiums for confirming paper from the country’s best-rated banks – led by State Bank of India – are once again relatively low. “Pricing for India was around the 5% level 12 months ago, but has reverted to around 1%,” says Martin Ashurst, senior trader – international trade finance origination and distribution at Banif Bank’s London offices.
On 2008-09 data, “the Middle East is India’s largest trading partner – particularly the UAE and Saudi Arabia – accounting for about US$50bn in 2009, split equally between imports and exports,” says Jain. “China was the second largest trading partner, taking in around US$10bn of Indian exports, and sending a huge US$33bn of imports. In third place was the US, which accounted for some US$22bn of Indian exports, and about US$18bn of imports,” he adds.
India’s trade with Africa is also significant, and currently estimated to be around US$39bn, a figure likely to expand further in 2010 after Bharti Airtel’s US$10.7bn acquisition in April of the Kuwaiti telecoms firm, Zain’s mobile operations in 15 African countries.
The Export-Import Bank of India (India Exim), has provided a rising number of lines of credit to the continent over the past year, including a US$30mn line to Cote D’Ivoire in early April. On the commercial financing side, SBI took part in Ghana Cocoa Board’s huge US$1.2bn pre-export financing in September 2009.
Sectorally, BAML’s mandate to support top-tier corporates has involved it in some “big-ticket financings” for refineries’ crude oil imports and refined product exports, to the extent that BAML has “about US$200m in outstandings on both sides”, Jain says. “In telecoms, we have some very large clients active in financing imports at any point in time, importing components and handsets, and we also get involved in textiles, engineering, automotives, and metals and mining.” Other major importing sectors are electronic goods, to meet the demands from India’s upwardly mobile middle class, and gold.
The big trade flows most regularly handled by the local player IDBI Bank are in the oil and metals sectors, says Raghu Bagalwadi, head of trade finance at the bank: “Over the last six months, there has been a boom in the import of both metals and commodities. Generally, the biggest ticket LCs that we open are in support of crude oil, for refineries in both the private sector and the public sector, or for metals deals in the copper, copper ore or steel sectors or in support of bullion trade.”
The bank also has a few large customers in shipping, and some sugar importing business, plus the boom in infrastructure has increased demand for equipment and capital goods financing for the power and transportation sectors. Typically the commodity imports are from trading companies in Switzerland, Hong Kong, Singapore or the Gulf.
Bagalwadi also predicts more coal deals with mines in Indonesia and Australia as well.
In all of the big-ticket infrastructure transactions, IDBI Bank aims to be “a dominant player”, says Bagalwadi. “We will be there on our own or sharing with other banks in the public and private sector. The LC in most cases is fronted by IDBI Bank. We are also very active in carbon credit advisory, registration, funding and securitisation. That business could continue past beyond 2012.”
The strength of India’s trade flows has also seen “more and more foreign banks coming in”, emphasises BAML’s Jain. “The foreign banks with strong Asian and international networks, such as Citi, Standard Chartered, DB and HSBC, are generally focused to handle the international flows, while the local banks focus on local flows.”
One major Asian specialist hoping to build a full banking business is ANZ, which in March 2010 received an in principle approval from the Reserve Bank of India for an Indian banking licence. “Once our onshore bank is operational, we can offer a fuller range of products from a trade perspective, and access to these. Until now, we have had a niche presence in which our main activity has been connecting large Indian corporates into our Asian network for their short-term working capital requirements and arranging offshore trade and debt syndication transactions,” says Subhas DeGamia, chief executive officer, ANZ India.
“Our key thrust going forward is the trade relationship between Australia and India, as well as India’s large and extensive trading relationships with greater Asia, especially China, Singapore and Hong Kong,” he adds.
India is the fourth largest export market destination for Australia, supported by natural resources flows such as iron ore, coal and natural gas. More than 50% of India’s energy demand is met by coal, and Indian corporates are keen to grow their coal asset base by buying long-term supply contracts from big coal mines in Australia and Indonesia, as well as looking for opportunities to acquire coal mines.
“Australia is also emerging as one of India’s top 10 trading partners,” adds DeGamia.
“Across this entire picture, the ability to have people on the ground across the region is increasingly important to Indian customers, as are structuring skills and expertise in niche areas like natural resources and coal.”
Others eying up the Indian market include FIMBank which announced in November 2009 that it has established a JV company in India – to be known as India Factoring – with Punjab National Bank, Italian factoring specialist Banca IFIS and Blend Financial Services.
The new Mumbai-based company, still awaiting its licence as GTR goes to press, is targeting both domestic and international trade flows, comments Veena Mankar, director of India Factoring.
“On the international market we would target all of India’s important export regions – the US, the Eurozone, Middle East and North Africa (Mena), CIS and Latin America,” she says. At present, “small and mid-size entities, especially those that are fast-growing, do not get adequate access to credit and there are also opportunities for large corporates in high-risk markets in Africa and the CIS, which would use forfaiting and structured trade products as Indian exporters become more sophisticated”.
Local strengths
If, as expected, India’s boom continues, local banks may have a significant edge in financing imports, according to IDBI’s Bagalwadi. “The ticket sizes of Indian importers will rise significantly as the country’s entrepreneurs get more ambitious, and they will need larger bank lines,” he forecasts.
“We have found that most global banks have begun to reassess the country exposure and bank limits and scale up the present limited lines.”
Where BAML can compete strongly, says Jain, is via its servicing and through-processing, in areas such as LC discrepancies and processing turnaround times, and outsourcing solutions. “We are very good in those areas, and also know all of our customers in person,” he stresses.
One problem for Indian banks, in respect of financing exports has been the non-availability of foreign currency funds at competitive rates. Exporters prefer Libor-linked funds as they are cheaper compared to rupee borrowing.
“Most Indian banks lack a strong foreign currency resource base, and so are compelled to borrow bilaterally to transact in foreign currency,” IDBI’s Bagalwadi notes.
This trend was illustrated in mid-2009, when, as the global financial crisis still raged, India Exim tapped a US$60mn joint trade financing line from Bank of Tokyo-Mitsubishi UFJ and the IFC. For the glut of smaller Indian exporters that had suffered reduced access to finance as a result of the crisis, the line enabled them to carry out export orders, as it improved India Exim’s ability to provide access to short-term foreign currency trade funding.
Mankar of India Factoring says: “Indian exporters obtain export financing from banks at a rate where the ceiling is specified by the Reserve Bank and classified as priority sector. The ceiling was reduced from 350 basis points (bps) over Libor to 200 bps over Libor in February 2010. This has been one of the main reasons that export factoring has not grown.”
Bagalwadi observes that the government has encouraged lending to the export sector though regulated interest rates and targets. “Although, after 13 months of negative growth, the export sector is growing again, the turnaround is not uniform,” he says.
He continues: “Gems and jewellery, pharmaceuticals as well as textiles are doing well; but sectors like engineering goods, handicrafts and so on are still lagging.”
Risk mitigation
To help mitigate risks in its trade finance business, IDBI Bank has a tie-up with the Export Credit Guarantee Corporation of India (ECGC) to fund factoring transactions and is sharpening its focus on export credit business.
“ECGC is meeting the market’s demands by offering banks customised solutions in terms of selective coverage and structured pricing. Banks, for example, do not want to pay a premium on all their export deals, as many of the buyers are world class. Hence, we have opted for individual guarantees instead of a whole turnover guarantee,” explains Bagalwadi.
Jain at BAML notes another key trend: “A very interesting and significant trend that can only increase is that corporates are becoming more and more familiar with risk mitigation techniques that cover a mix of liquidity and off balance sheet solutions.
“These include factoring and forfaiting, terms used generically in India to describe all without/limited recourse financing solutions, and credit insurance-backed discounting,” he notes.
India Factoring’s Mankar contends that because credit standards among local banks are still balance sheet-driven, this has created a niche for factoring within the SME market. “A large part of the factoring product offered by banks is supply chain finance for their large corporate clients, which fails to fully address the needs of vendors who have a diversified portfolio of buyers.”
She also points out an increasing demand for forfaiting as India’s exports grow into markets in the Mena, CIS and Latin American regions. “Even if these are not capital goods, forfaiting is being used for short term credit of 90 – 360 days in these areas. Also, established Indian corporates are increasingly looking at acquisitions or setting up operations abroad and this will require financing,” Mankar observes.
ANZ’s DeGamia suggests that the credit crunch has exerted its influence in this respect. “Indian exporters that used to trade on open account are increasingly trending towards LCs and standby LCs, to mitigate credit risk that has grown enormously during the last 12-18 months. Others often want to include some level of insurance, such as one of our large telecom customers which recently used ECA risk mitigation in a long-term financing arrangement,” he says.
For goods coming the other way, enquiries to ANZ from offshore capital goods suppliers to Indian companies, mainly in the telecoms sector, have included requests for supplier receivables structures. “This helps suppliers mitigate payment risk, lets them accelerate cash inflows, and reduces the receivables on the balance sheet,” DeGamia explains.
Indian corporates, while seeking risk mitigation at a marginal cost, are also increasingly deploying “evergreen” supply chain financing techniques.
“Trade finance for importing and exporting is being extensively used, but more and more it is being used as an integral part of people’s working capital strategy, supplementing the traditional balance sheet-based financing through direct loans,” explains BAML’s Jain.
For example, an Indian manufacturing company that buys in raw materials and exports refined production is exposed to liability gaps where it buys and sells. By using LCs and other open account financing solutions, it can easily raise liquidity locally, and can also mitigate buyer risk at a marginal cost. Banks moving into this market view it as easily-transacted, lower-risk trade finance, with a quick turnaround, that can be offered on attractive credit terms.
