MUMBAI, May 6: The Reserve Bank of India (RBI) will extend a Rs 1,300-crore nine-year facility to its wholly-owned subsidiary Bharatiya Reserve Bank Note Mudran Ltd (BRBNML) to set up two currency printing presses in West Bengal and Mysore and modernise two presses at Nashik and Dewas.

It has dropped the plan to raise over $350 million, 10-year foreign currency loan from the overseas syndicated market for the firm.

"The nine-year loan will have a three-year moratorium and carry a coupon rate of 100 basis points (one percentage point) over the bank rate (11 per cent). It makes no sense for us to go for foreign currency loan at a time when the Reserve Bank has so much of foreign currency assets," RBI deputy governor RV Gupta said.

According to him, since the RBI subsidiary will not have any export earnings, it would have been difficult to create a long-term hedge against the proposed foreign currency loan. "Considering that, we decided to opt for the rupee loan route," Gupta said. The total project cost for the two new printing presses has been pegged at Rs 1,600 crore with a debt-equity ratio of 1:1. The rest of the loan will be used to modernise the presses.

The decision to take the rupee loan in its own book instead of raising the forex loan from the overseas market has come as a surprise as the board of the subsidiary had only recently given the formal go-ahead for the proposal.

For quite some time, it had been deliberating on whether the entire amount will be raised through syndication or as a credit backed by an export credit agency (ECA). The advisor to the issue, SBI Caps, has had rounds of discussions with Hermes, the German export credit agency.

Market watchers feel the relatively high cost of borrowing had prompted the central bank to review its decision. Three foreign banks in the race to bag the mandate, Bank of America, Fuji and Societie Generale, were not willing to treat the exposure as a sovereign risk one as the government of India could not issue the guarantee. ``It could not be even considered quasi-sovereign as RBI was not willing to issue a letter of comfort to the lenders. Consequently, it was not possible to offer a fine rate,'' a senior banker said.

Although the Reserve Bank bargained hard, it might not have been possible to raise the loan at a fine rate without the letter of comfort since investors abroad are not extremely bullish about India at this moment, leading market analysts felt.

The all-in cost for the proposed 10-year loan would have been pegged at about 100 basis points over Libor. Both Konkan Railways and Indian Railway Finance Corporation managed to get finer rates in the syndicated market as the exposures were deemed sovereign risk loans.The central bank has, however, contracted a $20-million facility from the State Bank of India.

The short-term loan, carrying an all-in cost of 25 basis points over three-month Libor and the first-ever commercial foreign currency raised by the central bank, is a stand-by facility to meet the suppliers' credit before the RBI disburses the rupee loan, Gupta said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.