The swap transactions involving conversion of fixed rate liabilities into floating rate foreign currency liabilities have not only affected the banks but also taken a toll on those corporations which have bigger exposures to such deals than the banks.
During the close of the financial year, most of the public sector undertakings entered into swap deals with foreign banks while they decided to place bonds to raise funds.
According to market sources, Power Finance Corporation and Rural Electrification Corporation are two of many public sector undertadings which placed these bonds under such arrangements. PFC had placed bonds to raise funds worth Rs 1,000 crore (Rs 10 billion) while REC mobilised around Rs 3,000 crore (Rs 30 billion).
Besides, the swap product was also sold to small and medium corporates in smaller cities like Coimbatore, Tirupur, Raipur, said the sources.
These corporates, while placing bonds with the foreign and private sector banks, bought swaps in Swiss franc, a currency in which they have no receivables.
According to industry sources, while such products were usually sold by private and foreign banks, public sector banks were not allowed by the Reserve Bank of India to deal with these products.
Therefore, even when these corporates approached their banks in public sector banks for unwinding these transactions, they could not do so.
These corporates have taken hit on the exchange rate front as their floating rate payout grown substantially with fast depreciation of the rupee to 46 to a dollar. These transactions were struck when the rupee was ruling at around 43.80 to a dollar.
Even the interest rates too have gone up both in Swiss franc and Japanese yen with the rate hardening stance of the Euro zone and Japan.
Under these products, the foreign and private banks subscribed to these bonds under one-to-one bilateral arrangement and offered funds at a rate cheaper then the market.
Nevertheless, the product was sold with the condition that they would buy these swaps for converting the fixed rate rupee liability into floating rate.
As these products were sold as one package, they do not fall under the category of derived exposure, said a banker.
These corporates were given to understand that interest rates in yen was low and the currency movements with euro and yen were parallel to the spot rupee.
Under the arrangement, the banks would pay the fixed rate liability and corporates pay the floating rate payoffs pegged to yen or Swiss franc.
However, the scene has reversed now with the rise in interest rates and rupee losing against the dollar. This has put pressure on the corporates as the deals have run into losses.
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