Tirupur based textile exporter had to import Solar Panels from China. Duty was very high. The client had to make a choice regarding funding of the import. He had the option of a term loan and a foreign currency loan. The required a loan of nine crores to fund this import. Duty on import being already very high, he wanted to minimize his funding cost and opt for the optimal solution.
Myforexeye Value Addition:
Advisory team of Myforexeye did their research and found that if the client takes up a term loan of INR 9 crores with cash credit access, for a period of 84 months (7 years) the client would have to quote a 33% (of the total amount) to the bank, on which he will receive an interest of 5%. Thus, his net monthly payment was coming out to an amount of around 4 lacs per month. The other option was the Foreign Currency Loan. The client had to open an LC with his bank. And after 3 to 4 months he would have to start making his payments. The client could take up a Supplier’s credit of three years which had interest payment of Libor + spread (200 bps), at that time, which totaled to a payment of around 1.4 lacs INR . When compared, the cost of funding from a Foreign Currency Loan was 32 lacs lower than that of a term loan. Thus, it was advised to the client to take up the Foreign Currency loan. But, there was an additional concern on this - Payment for the loan had to be made in dollars. Fearing the exchange rate risk the client wanted to hedge all of the interest payments and principal amount too. If the client did so, the annualized cost would be around 4% which is too high because in 3 years’ time the rupee depreciation is around 3% (based on an “Annualized Premium and Rupee Change Comparative Analysis” by Myforexeye Research Team). This would ultimately lead to a bad risk reward ratio. Thus, it was advised to keep the position open for now and hedge the principal amount after two years. By following the advice of Myforexeye team the client not only found the optimal solution for import funding but also saved on unnecessary hedging cost.
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