Industry sources say the State Bank of India (SBI) leads the pack, followed by the Industrial Credit & Investment Corporation of India (ICICI) and a few state-run banks. SBI has recently entered into a number of long-term swaps with its corporate and PSU clients.

The move assumes significance in the context of global rating agency Moody's downgrading India by two notches to the speculative grade. Senior bankers apprehend that there could be a problem in raising funds from American and European banks in the wake of Moody's downgrading India's sovereign rating. Domestic banksfaced a similar problem in 1991. "So far, the rating revision has had no impact on banks in Asia and the Middle-East. They are willing to lend to us," a senior banker said.

Confirming the development, a senior SBI official said: "We have taken a policy decision to go for long swaps, as this will help the bank access forex resources and reduce its dependence on the term-money market. Besides, we also earn interest on the rupee sources, which are swapped with foreign- currency funds." The institutions are taking the swap route to beat the higher cost of external- commercial borrowings (ECBs) in the wake of Moody's downgrade. ICICI senior general manager Kalpana Morporia said: "The rising cost of ECBs will not have any major impact on the institution's resource-raising programme, as it will take the swap route to access foreign-currency funds."

ICICI entered into $100-million worth of swap deals with the State Bank in January this year. The maturity profiles of two deals were five and seven years.

Besidesthe proceeds of global-depository receipts (GDR) and ECBs, corporates and PSUs have been swapping their long-term forex funds raised from multilateral agencies. These funds have been swapped with rupee funds of banks and FIs.

About the rationale behind the long-term swap deals, an industry source said: "This is a win-win situation for both banks and FIs, as well as for corporates and PSUs. While banks get long-term forex funds to back their foreign-currency assets, the corporates get a natural hedge against the forex risk."

In a swap deal, PSUs and corporates park their long-term forex resources with banks and institutions and receive an equivalent amount of the rupee -- depending on the spot rate of the rupee on the day the deal takes place. On the maturity of the deal, the currencies are swapped. Both banks and the corporates earn interest on the rupee and forex resources respectively for the maturity period of the deal.

For banks, there is no exchange risk for the forex resources, as they do notconvert the foreign-currency funds into rupee resources. "This is a unique strategy, since it offers banks and institutions an avenue to deploy their excess rupee funds at a time when growth in non-food credit is slack. The swap deals boost their interest income, besides helping them raise forex resources without floating any debt instrument or accessing the money market," a senior analyst said.