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non-banks go slow on offshore borrowing as cost edge shrinks Subhana Shaikh5 min read13 Aug 2026, 05:50 AM ISTUS
Treasury yields have climbed, while increased issuance by Indian banks raising dollars to fund foreign-currency
non-resident (FCNR) deposits has pushed spreads higher.(Pexel)SummaryRBI’s concessional hedging window opened a
cheaper route to overseas funds for PSU lenders, but higher US yields and a crowded dollar market have eroded the
advantage. With offshore and domestic borrowing costs now nearly at par, PSU non-banks face a tougher funding
choice.Gift this articleCheck your portfolioThis is a Mint Premium article gifted to you.Subscribe to enjoy similar
stories.Subscribe nowMumbai: The Reserve Bank of India’s (RBI's) concessional hedging window was expected to make
overseas borrowing an attractive option for public sector companies. Seventy days on, the advantage is already wearing
thin. Higher US Treasury yields and a rush of Indian banks into the dollar market have narrowed the cost gap with
domestic bonds to just 8-10 basis points (bps), leaving public sector non-banking financial companies (NBFCs) weighing
whether to borrow overseas now, wait for better rates, or simply stay home, two PSUs and two merchant bankers said.The
squeeze is coming from both sides. US Treasury yields have climbed, while increased issuance by Indian banks raising
dollars to fund foreign-currency non-resident (FCNR) deposits has pushed spreads higher, making dollar borrowing less
lucrative for the government-run non-banks.“The spread has gone up because of supply. When there was not much Indian
paper, they used to trade at around 100 bps over US yields. Now, the spreads have gone up, and they are anywhere between
110 and 130 bps,” a senior merchant banker said.On 5 June, announcing its monetary policy review, RBI announced it
will provide a concessional forex swap facility for external commercial borrowings (ECBs) raised by PSUs and banks until
31 December 2026, for a maximum of five-year tenure. Under the scheme, RBI will effectively bear a fixed swap cost of
1.5% per annum for hedging the dollar exposure, allowing borrowers to access overseas funds at significantly lower
overall costs.Also Read | NaBFID plans up to $4 billion in overseas borrowing under RBI hedging windowThe cost
calculation showed the narrowing gap. For a three-year US dollar bond, a treasury yield of around 4.27%, combined with a
spread of about 110 bps, takes the base borrowing cost to roughly 5.37% on a semi-annual basis. The RBI’s 1.5% hedging
facility then adds to the effective cost, while another roughly 30 bps may be required for coupon hedging, according to
market estimates.That takes the overall cost of dollar borrowing to around 7.20% compared with domestic bond yields of
around 7.28-7.30% for the PSU issuers. The difference is a mere 8-10 basis points, significantly reducing the incentive
to borrow abroad. Coupon hedging refers to hedging the periodic interest payments on a foreign-currency borrowing. The
RBI facility does not cover this component, which can add roughly another 30 bps to the cost.Currently, dollar-rupee
forward rates are hovering a tad over 3% annually.An email sent to public sector non-banks Rural Electrification Corp
(REC), Power Finance Corp (PFC) and Housing Urban Development Corp Ltd (Hudco) did not elicit any response until press
time.“From a rate perspective, the difference is narrowing and that is one thing to worry about,” said the senior
banker cited above.Also Read | Geopolitical tensions, cyber threats key risks to Indian banks, economy: RBIOn 7 August,
frequent AAA rated issuers such as REC raised ₹3,000 crore through domestic bonds maturing in three years at 7.28% and
₹3,346 crore via 15-year paper at 7.49%. Last month, Small Industries Development Bank of India (Sidbi) raised
₹8,000 crore via November 2029 bond at 7.29%, merchant bankers said.“The RBI window has created an alternative
funding channel, but it has not made overseas funding an automatic winner. Elevated US yields have narrowed the pricing
advantage of ECBs over domestic funding, while PSU domestic bond borrowings themselves have weakened amid elevated and
volatile bond yields,” Venkatakrishnan Srinivasan, founder of Rockford Fincap said.Since the US-Iran war broke out on
28 February, yield on the 10-year benchmark US treasury yield has gone up by 65 bps to 4.68%, while that of the
corresponding domestic government bond yield is up only 10 bps to 6.78% as of 11 August, Bloomberg data showed.The
overseas market has also become crowded, as banks have been raising US dollars to fund the FCNR deposits that has
created a supply overhang in the dollar market for PSUs.According to data released by RBI on 1 August, banks raised
around $36.73 billion through the FCNR route until 31 July and the market expects the mobilization to reach around $90
billion by September end, when the special FCNR deposit window closes.Overseas foreign currency borrowings have garnered
$2.58 billion, with the response from ECBs underwhelming at $1.52 billion under the scheme.Also Read | Dollar race:
Foreign banks ramp up FCNR deposits, narrow gap with locals“Mostly, we have seen only a few banks have raised. If the
big banks are raising, obviously there is some crowding out happening. Possibly, the PSUs will wait for some time,
prepare the paperwork and then tap," said Soumyajit Niyogi, director at India Ratings and Research.So far, State Bank of
India, HDFC Bank, ICICI Bank and Axis Bank have tapped the offshore market to raise largely term loans.Among the PSUs,
PFC has raised $300 million via five-year dollar-denominated bond and National Bank for Financing Infrastructure and
Development (NaBFID) have raised $850 million via term-loans. NaBFID last month raised $850 million via term-loans at
secured overnight financing rate (SOFR) plus 120 bps, managing director Rajkiran Rai told Mint. SOFR, trading at 3.64%,
is a broad measure of the cost of borrowing cash overnight collateralized by treasury securities.For PSUs, the
expectation is that borrowing activity could pick up after September once the FCNR mobilization window closes and some
of the supply pressure eases.Yet, waiting also carries a risk. US Treasury yields could move in either direction
depending on the Federal Reserve’s rate trajectory, inflation and labour-market conditions. A weaker US labour market
could support lower yields and make it worthwhile for Indian issuers to wait, while persistent inflation and higher
crude oil prices amid geopolitical tensions could keep yields elevated or push them higher.Some NBFCs are also looking
at overseas borrowing as a diversification tool, rather than purely as a cheaper source of funds. Dollar funding gives
access to a wider investor base, including those who may not have sufficient limits to invest in Indian domestic
debt.The current preference appears to be for overseas term loans, rather than dollar-denominated bonds.“First, the
yield should come down, then only we can go for US bond issuances,” a senior PSU official said on the condition of
anonymity. The official said that term loans, particularly those raised through international financial hub Gift City,
remain more viable because they do not attract the same withholding-tax burden as bonds.“In terms of bonds, your
coupon gets fixed for five years. In term loans, there is a variable rate,” the official said. “Bond is not viable
at all…You will not find any PSU getting into the bond market.”“With bank and short-term funding also remaining
competitive, PSU NBFCs now have to optimize their funding mix across overseas borrowing, domestic bonds and bank
funding, rather than simply chase the cheapest headline rate,” Srinivasan said.Gift this articleCheck your
portfolioAbout the AuthorSubhana ShaikhSubhana Shaikh is a business journalist at Mint, where she covers the Reserve
Bank of India, monetary policy, and India’s bond markets. She has seven years of experience in reporting on financial
markets, with a focus on banking and the broader financial system.<br><br>She began her career after
completing her postgraduate diploma at the Indian Institute of Journalism and New Media, Bengaluru. She then spent five
years at Informist Media, a news wire agency, where she closely tracked bond markets and the BFSI sector, developing a
strong foundation in market reporting. She later moved to NDTV Profit, where she expanded her coverage across a wide
range of business and economic stories.<br><br>At Mint, Subhana focuses on explaining central bank
decisions, bond market movements, and banking trends for her readers. Her reporting combines on-ground inputs with
careful analysis to help audiences understand complex financial developments.<br><br>Based in Mumbai, she is
interested in exploring stories across the business landscape. Outside of work, she enjoys reading and spending time
with her three cats.Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to
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