Multi-Currency Choices : A Finance Cost Decoding Framework

A domestic company with no export or import operations may still have the option to raise debt in foreign currency. One such option is through the issuance of Foreign Currency Non Resident (FCNR (B)) route. FCNR (B) is disbursed in a foreign currency and carry a fixed interest rate, which is usually lower than the rate of interest of domestic currency. However, it is important to note that there are regulations and guidelines in place for raising debt in foreign currency, such as the Reserve Bank of India's Master Directions on External Commercial Borrowings, Trade Credits and Structured Obligations. It is advisable for companies to consult with financial experts and adhere to the relevant regulations when considering raising debt in foreign currency.

Various options available to raise foreign currency loans

Term Loans

External Commercial Borrowings (ECB)

Foreign Currency Term Loans (FCTL)

Working capital loans

Capital goods imports

Buyer’s & Supplier’s Credit on Non-fund based limits provided by banks

When evaluating financing options for a Greenfield project, it is important to consider the cost of borrowing in local or foreign currency. Borrowing in foreign currency may offer lower interest rates, but it also exposes the company to exchange rate risk. On the other hand, borrowing in local currency eliminates exchange rate risk, but may come with higher interest rates.

Another factor to consider is the strategy for purchasing machinery. Localized purchases may offer cost savings through reduced transportation and import costs, while importing machinery may provide access to more advanced technology or better financing terms. Learn about the various funding options available for capital goods purchase.

Ultimately, the optimal funding strategy will depend on a careful analysis of the costs and benefits of each option, taking into account the specific needs and circumstances of the project. It is important to weigh the potential cost savings against the risks and uncertainties associated with each option.

Pre-Sanction Stage advisory -Myforexeye assist companies arrive at critical asks from financial institutions which could potentially reduce the cost of borrowing. It is important to deep dive into specific cost items to arrive at an optimal funding route for the organization.

Post-Sanction implementation - Once the project is sanctioned it is important to evaluate covenants in the sanction letter and breakup of funding between fund based and non-fund based limits. In case sanction allows borrowing in foreign currency then Myforexeye will assist in proper drawdown and formulating risk management strategies to mitigate interest rate and currency risk.