Project Report (1)

“Analysis of the currency risk of HUDCO”

An Internship Project ReportSubmitted in the partial fulfillment of the requirement for the award of the Degree of Masters of Business Administration 2010-2012

INSTITUTE: IIPM, NEW DELHI

BATCH N SECTION: FALL WINTER 2010-12; FC2

STUDENTS ID:

INSTITUTION NAME: HUDCO

INTERNSHIP START & FINISH DATE: 01-7-2011 TO 26-8-2011

AREA OF RESEARCH: CURRENCY RISK OF HUDCO

Submitted By: Under the Guidance of:Mr. RAJA DUTTA Mr. ACHAL GUPTA

ABSRTACT:

HUDCO was established in 1970 as a Government of India undertaking to fund

housing and urban infrastructure sectors; Government of India wholly owns the

company. HUDCO is in the business of borrowing fund at the lower rate and

lending it at higher rate. Some part of this Borrowings are in foreign currency

from international financial institutes like USAID, Japan bank of International

Cooperation (JBIC), Kreditanstalt fur Wideraufbau (KfW), Asian development

Bank (ADB) etc or are from Indian banks in US dollars termed as FCNR loans.

This loan drawing and its repayment of interest and principal along with

monetary assets and liabilities denominated in foreign currencies are recorded

and restated at the exchange rate prevailing on the dates of the respective

transactions except transactions where forward contract is taken, making it

liable to exchange rate fluctuation risk. So this project is undertaken to find out

how HUDCO goes for the foreign loan and then what are the strategies that are

adopted to counter the currency risk.

Beginning with the project we try to understand on what basis these loans in

foreign currency are picked and the criteria adopted by Financial Institutions to

lend the loan. How FIs uses LIBOR and borrower’s rating criteria (like capital

adequacy, operating efficiency, risk appetite, Earning capacity, Asset quality,

management efficiency, etc). Next step is after receiving the loan is the hedging

policies adopted by HUDCO to overcome the exchange rate fluctuations.Mainly

SWAP ROUTE is adopted by HUDCO to circumvent the risk. Then the project

tries to take an outlook on the future dollar value for the forward contract

considering different macro-indicators & current economic developments like

Greece debt crisis, Gold prices, China-US exchange etc to help HUDCO in

deciding the currency rate agreement for upcoming years. In the end a sincere

attempt is made in recommending some hedging policies to HUDCO.

Certificate from the Company

This is to certify that Raja Dutta daughter of sh. Hirak Dutta pursuing

Masters of Business Administration from Indian Institute Of Planning &

Management , New Delhi has successfully completed Project Report in our

organization on the topic titled, Analysis of the currency risk of HUDCO

01.7.2011 from to 26.8.2011. During his project tenure in the organization, we

found her hard working, sincere and diligent person and her behavior and

conduct was good during the project. We wish him all the best for his future

endeavors.

Signature:

Name and Designation of the Guide:

Certificate of Originality

This is to certify that the project report entitled “Analysis of the causes behind the lower bond rating of HUDCO ‘Submitted to Delhi Institute of Advanced studies in partial fulfillment of the requirement for the award of the degree of Masters of Business Administration is an original work carried out by Mr. Raja Dutta under the guidance of Mr. Achal Gupta. The matter embodied in this project is a genuine work done by Mr. Raja Dutta to the best of my knowledge and belief and has been submitted neither to this University nor to any other University for the fulfillment of the requirement of the course of study.

Signature of the Student: Signature of the guide

Designation: Senior Finance Officer

Acknowledgement

No small task however can be completed without proper guidance and

encouragement. It gives me great pleasure to excess my deep sense of gratitude

and reverence to every person who directly or indirectly has helped to create a

congenial atmosphere for successful completion of this project report.

I would like to extend my sincere thanks to Mr. .ANUBHAV ARORA and Mr.

SUDIP SURAL (CORPORATE AND GOVERNMENT RATINGS HEAD-

HUDCO Ltd) my project guides for their guidance and support throughout my

training at HUDCO LTD., New Delhi. Their calm demeanor and willingness to

teach has been a great help in successful completion of my project. My learning

has been immeasurable and working under them was a great experience. My

sincere thanks also extend to all the staffs of HUDCO Ltd. for providing a

hospitable and helpful work environment and making my summer training an

exciting and memorable event.

My heartfelt thanks are also towards the guide of my Institute without their

continuous help and enthusiasm the project would not have been materialized in

the present form.

I will fail in my duty if I don’t express my gratitude to Mr. Achal Gupta

(SENIOR FINANCE OFFICER- HUDCO Ltd) who helped me a lot in

completing my project successfully.

Finally, I also wish to thank the MR.Arindham chaudhary, Director, IIPM, New

Delhi for making this experience of summer training in an esteemed

organization HUDCO Ltd. possible. The learning from this experience has been

immense and would be cherished throughout life.

Mr. Raja Dutta

Contents

1. Introduction:...................................................................................................10

2. Rationale behind the project:..........................................................................11

3. Methodology:..................................................................................................12

4. Understanding the borrowing of Foreign Currency Loan..............................13

4.1 FCNR(B) Loans:.......................................................................................13

4.1.a Risk involved in FCNR(B) Loans.......................................................14

4.2 LIBOR:...................................................................................................14

4.2.a Risk involved in LIBOR......................................................................15

4.3 Bilateral Loans...........................................................................................15

4.4 Multilateral loans.......................................................................................16

5 HUDCO’s Hedging Policy..............................................................................17

5.1 Plain Vanilla Swap....................................................................................17

5.2 Forward Rate Booking..............................................................................18

6 Outlook on USD/INR......................................................................................19

6.1 Dollar Behaviour.......................................................................................19

6.2 Greece Debt Crisis.....................................................................................20

6.3 Strengthening of Indian Economy and INR..............................................21

6.4 China High Reserves.................................................................................22

6.5 China Yuan Policy.....................................................................................23

6.6 China Economy may Crash.......................................................................23

6.7 Conclusion on USD/INR...........................................................................24

7 Suggesting a New Route of Borrowing...........................................................25

7.1 External Commercial Borrowing...............................................................25

7.1.a ECB Approval Route...........................................................................25

7.1.b Amount & Maturity.............................................................................25

7.1.c All-in-cost ceilings..............................................................................26

7.1.d End Use...............................................................................................26

7.1.e Recent Trends......................................................................................26

7.2 Foreign Currency Convertible Bonds (FCCB)..........................................27

7.3 Benefits of ECB/FCCB.............................................................................27

8 Suggestions for HUDCO.................................................................................29

Appendix.............................................................................................................31

BIBLIOGRAPHY:.............................................................................................33

1 Introduction:

OVERVIEW OF THE INDUSTRY

FINANCIAL SECTOR

Financial Sector of India is intrinsically strong, operationally sundry and

exhibits competence and flexibility besides being sensitive to India’s economic

aims of developing a market oriented, industrious and viable economy.

An established financial sector assists greater standards of endowments and

endorses expansion in the economy with its intensity and exposure. The fiscal

sector in India entails banks, financial organization, markets and services. The

sector is classified as organized and conventional sector that is also recognized

as unofficial finance market.

Fiscal transactions in an organized industry are executed by a number of

financial organizations which are commercial in nature and offer monetary

services to the society. Further classification includes banking and non-banking

enterprises, often recognized as activities that are client specific.

The chief controller of the finance in India is the Reserve Bank of India (RBI)

and is regarded as the supreme organization in the fiscal structure. Other

significant fiscal organizations are business banks, domestic rural banks,

cooperative banks and development banks. Non-banking fiscal organizations

entail credit and charter firms and other organizations like Unit Trust of India,

Provident Funds, Life Insurance Corporation, Mutual funds, GIC, etc.

Financial Sector of India – Eligibility for government autonomy

Mentioned below are certain criterions that are required to be fulfilled for

acquiring government autonomy in India:

Availability of sufficient fund of up to 8%

Accessibility of total non-performing wealth of below 9%

Minimum net possessed funds of more than USD 2.5 million and net

revenues of minimum past three years.

Financial institutions that satisfy the abovementioned requirements will

be authorized functional independence in almost all managerial areas.

Financial Sector of India – RBI guidelines for NBFC's

The Reserve Bank of India has relaxed its guidelines for the operation of non-

bank finance companies (NBFCs) in India considering the various investments

from the investors. It has also permitted leasing of machinery and rent-buying

credit firms with endowment level rankings to avail public savings increase the

maximum limit on the amount of public investments on these NBFCs that may

allow and expand the closing date for observance on its norms by two years.

The fiscal competitiveness of several NBFCs persists to be of importance to the

administration and reserve bank of India controllers. There is a significant

merging activity in this industry as NBFCs are regulated by stringent yardsticks

that are obligatory to fulfill.

In addition, India has entered into new agreements with WTO in the area of

fiscal services in Geneva on December 1997.

Financial Sector of India – Chief Characteristics

Some of the major characteristics of Financial Sector of India are:

The financial sector of India allows Most Favored Nation (MFN)

reputation to all international banks and firms offering financial facilities.

The sector has relaxed previous MFN tax exemption on banking

activities.

Allows 12 new financial bank division authorizations every year to

international banks, that is higher as compared to the existing 8 every

year.

Raises the 10% limit of reinsurance by insurance firms in India.

Permits 51% foreign endowment in fiscal advisory, issuing, hiring,

business enterprise capital, business banking and non-banking credit

firms.

HUDCO AT A GLANCEHistory

The housing and urban development sector plays a significant role in the

economic and social development of a country. The access to and the quality of

housing and urban basic services directly influence the quality of life of people,

their productivity levels and growth potential.

Before the establishment of HUDCO, the Government of India was operating a

number of subsidized housing schemes and loan schemes. The subsidized

housing schemes were meant for industrial workers, economically weaker

section of the society and slum dwellers, while the loan schemes were targeted

for the people in the low-income and middle-income groups as well as rental

housing schemes for State Government employees. All these schemes were

under the direct control of the Ministry of Works and Housing. Such a system

of housing finance did not give the required thrust for promoting housing

development activities, which in many cases were considered of lower priority.

Towards the close of the 1960s, it was realized the need of a setting up a

housing organization in the country as the availability and cost of bank credit

were the prime constraints in this development. Since the banking industry,

until then, was in the hands of a few industrial houses, the first major step taken

to initiate change in favor of the poor was the nationalization of the banks in

June 1969. However, when the then Hon’ble prime Minister Smt Indira Gandhi

looked for ways to improve the living conditions of slum-dwellers and

economically less fortunate peoples, she found that while we had a host of All

India Term Lending Institution such as IDBI, IFCI, ICICI etc; catering to the

diverse credit and related needs of the Indian industry, there was no institution

to provide housing finance to the rural and urban poor or the even to meet the

credit needs of housing boards, development authorities and other urban bodies

which were being setup by the State Government during the fourth Plan period.

It was in this context that a decision was taken at the highest level to set a

Housing and Urban Development Corporation (HUDCO) which could take a

comprehensive look at the need of the sector and find workable and effective

solutions. This experiment of establishing a unique techno-financial institution

and the fascinating journey it undertook during the last four decades would

certainly qualify as one of the key developments in this sector in the whole

world.

The establishment of HUDCO in 1970 as a sectoral institution for

comprehensively dealing with the problems of growing housing shortages,

rising number of slums and for fulfilling the pressing needs of the economically

weaker section of the society was one of the significant steps in the series of

initiatives taken by Government. Thus the setting up of HUDCO was aimed at

accelerating the pace of construction and elimination of housing shortages and

for orderly development of urban centers.

The Housing and Urban Development Corporation Ltd. (HUDCO) was

incorporated on April 25, 1970 under the Companies Act 1956, as a fully owned

enterprise of the Government of India.

Vision

"TO BE AMONG THE LEADING KNOWLEDGE HUBS AND

FINANCIAL FACILITATING ORGANIZATIONS FOR HABITAT

SETTLEMENT" 

Mission

"TO PROMOTE SUSTAINABLE HABITAT DEVELOPMENT TO

ENHANCE THE QUALITY OF LIFE"

HUDCO would continue to explore opportunities in related sectors for

sustainable profits, which in turn will help it to further support its social

objectives. Towards expanding its role in the sectors, HUDCO plans to integrate

itself along the complete project finance value chain and position itself as sector

expert in the identified areas. HUDCO would leverage its expertise and

experience gained over the years towards augmenting its Interest based

activities. HUDCO's IT strategy is also focused on the right technology

solutions to meet its business objectives, including setting up an industry

benchmarked integrated solution spanning HUDCO's business processes.

HUDCO is poised to take upon a much more significant role in the sector by

supporting the growing needs of housing and infrastructure in the coming years

with the continued growth of economy. HUDCO is also committed to play its

unique social role with a special focus on the needs for the economically weaker

sections and lower groups.

Objective

The Article of Memorandum of HUDCO stipulates the Major Objective of

HUDCO as under:

1. To provide long term finance for construction of houses for residential

purposes or finance or undertake housing and urban development

programmes in the country.

2. To finance or undertake, wholly or partly, the setting up of new or

satellite town.

3. To subscribe to the debentures and bonds to be issued by the State

Housing (and or Urban Development) Boards, Improvement Trusts,

Development Authorities etc., specifically for the purpose of financing

housing and urban development programmes.  

4. To finance or undertake the setting up of industrial enterprises of building

material.

5. To administer the moneys received, from time to time, from the

Government of India and other sources as grants or otherwise for the

purposes of financing or undertaking housing and urban development

programmes in the country.

To promote, establish, assist, collaborate and provide consultancy services for the projects of designing and planning of works relating to Housing and Urban

Development programmes in India and abroad.

THE ORGANISATIONAL STRUCTURE

FINANCE & ACCOUNTS

CORPORATE PLANNING

DESIGN & DEVELOPMNT

WING

URBAN AND REGIONAL PLANNIG

ECONOMICS

WING

MGMT SERVICES

WING

RESOURCE

MOBALISATION

ASSET MANAGEMEN

T

HUMAN RESOURCE

WING

HUDCO

BOARD OF DIRECTORS

KL Dhingra (Chairman & managing director)

S.K Singh {director & Jt. Secretary (Housing)}

Dr. R.K Vats (director & Jt. Secretary & Financial advisor)

Rajpal Singh Solanki (Director)

T Prabakaran (Director Finance)

SK Tripathi (Director Corporate Planning)

MK Gupta (Company Secretary)

PROGRAMMES

In order to realize the objectives for which it was established, HUDCO has

implemented a variety of schemes for shelter and services, thereby improving

the living conditions of the people.

Apart from financing housing schemes, HUDCO is also contributing to improve

the quality of life by augmenting basic community facilities and infrastructural

services.

Projects involving self help by the beneficiaries are promoted by encouraging

sites and services scheme, core housing, skeletal housing, shelter up gradation

and so forth. In order to provide basic facilities in the existing houses where

adequate sanitary disposal system are not available, financial assistance for

basic sanitation schemes is being extended on liberalized items.

HUDCO extends assistance benefiting the masses in urban and rural areas under

a broad spectrum of programmes as listed below:

HOUSING

Urban Housing

Rural Housing

Staff Rental Housing

Repairs and Renewals

Shelter and Sanitation facilities for foot path dwellers in Urban

Areas (Night Shelter and Pay and Use toilets)

Working Women Ownership Condominium Housing

Housing through Private Builders/Joint Sector

Individual Housing Loans through ‘HUDCO Niwas’

Land Acquisition

INFRASTRUCTURE

Integrated Land Acquisition and Development

Environment Improvement of Slums

Utility Infrastructure

Social Infrastructure

Economic and Commercial Infrastructure

BUILDING TECHNOLOGY

Building Centers for Technology Transfer at the Grass- roots

Building Material Industries

CONSULTANCY SERVICES

Consultancy in Housing, Urban Development and Infrastructure

RESEARCH AND TRAINING

Capacity Building and Technical Assistance to all Borrowing

agencies, Research Training and Networking in human Settlement

Planning and Management.

Future Outlook:

HUDCO has been the principal Government body, which has been focusing on

financing EWS and LIG housing over the years. HUDCO has been able to meet

vital need and create a niche in the area of social development. HUDCO plans

to explore further opportunities in related sectors for sustainable growth, which

in turn will help it to further support its social objectives. In addition, HUDCO

also plans to leverage upcoming opportunities in integrated townships and

municipal infrastructure especially through JNNURM.

To enhance focus on identified growth sectors, dedicated sector and domain

teams, as the strategic business units have been put in place. In the field of

information technology, implementation of integrated ERP solutions is also

underway to enable HUDCO to be competitive and to be able to respond to the

business requirements more efficiently

ANALYSIS OF HUDCO

HUDCO is a financial institution whose main business is to provide loan to

housing and infrastructure sector. Recently HUDCO has diversified its

business to other sectors also, now it is actively involved in power sector

and personal housing sector loans.

Operational Analysis

Advance Portfolio:

Asset for any financial institution is its advance portfolio. How prudent it is

in lending loan and how its advances are growing with clients having good

credit profile carries a great weight age for its operational performance.

HUDCO has total Advance portfolio of Rs 22042.13 crore as on 31st

December 2008.

The maximum exposure of the HUDCO`s portfolio is towards Urban

infrastructure accounting 68 % of its total portfolio; exposure to housing is

moderate with 25 % of its total portfolio.

When we look at the portfolio of HUDCO by categorizing it in to

government and non-government exposure.

TABLE -2

Housing UIF Hudco Niwas

Govt. Private Govt. Private Govt. Private

Credit

Portfolio

4276.83 1306.79 11130.73 3804.61 1183.67 339.50

% 76.59 23.40 74.52 25.47 77.71 22.28

Exposure to private and government sector in its portfolio is heavily

weighted toward Government sector.

Loans Sanctioned and Released:

During the year 2007- 2008 Company has sanctioned total of 13500.61

crore of loans which has grown by 11 % compare to last year of 12162.55

crore.

Sector wise Loan Sanction:

During the year 2007-2008 total loan sanctioned was Rs. 13500.61 crore out

of which Rs. 2151.86 crore for housing and Rs. 11348.75 crore for urban

infrastructure schemes. In housing schemes also Rs. 2083.86 crore was

sanctioned for urban housing, Rs. 8.91 crore was for rural housing and Rs.

59.09 crore was for retail housing under the umbrella of

HUDCO Niwas

Resource Profile: HUDCO has a diverse resource profile. It has been

mobilizing resources from various sources like banks, Financial

Institutions, Capital Market, International Bilateral/Multilateral

Organizations, Trusts and individuals etc. The borrowing program

typically includes long term and short term loans / lines of credit, public

deposits, debentures/bonds, Commercial paper etc. Bonds account for

39% of HUDCO`s resources, around 37% is accounted by rupee term loans

from banks. Public deposit scheme accounts for 8% of total borrowings.

The remaining 16% is raised through international loans, FCNR Loans,

Loans from FIs etc.

Cost of Borrowing: HUDCO’s cost of borrowing has increased in FY 2009-

10 to 8.7% compared to the previous of borrowing to 8.5 year cost %. The

income of the HUDCO largely depends on the cost of borrowing.

Non-Performing Asset: HUDCO has made good effort to resolve the NPAs;

this is reflected by the fact that the NPA for FY 2009-10 was 10.3% where

as for FY 2008-09 were 10.9%. Although HUDCO has expanded its

business more towards private sectors in which it has got very bad track

record of recover, it has improved the NPA. Net NPA for 2008-09 is much

lower at 5.25% compared to the previous year Net NPA of 7.5 %.

Financial Analysis:

Profitability: For profitability analysis we have mainly used ratio analysis.

With the help of balance sheet and ratios we have computed some ratio

that is relevant for the Financial Institutions. The ratios for the HUDCO

are as follows:

Key Financials

TABLE-3

31-Mar-

09

31-Mar-

10

Gross Interest and Dividend Income 26750.8 24148.3

Total interest Expense 16561.6 14124.7

Total non interest operating Income -2082.0 1149.8

Total non interest expenses 1045.4 1201.2

Pre-Impairment Operating Profit 7061.8 9966.2

Operating Profit 7712.2 7858.2

Pre tax profit 6565.1 7858.2

Net income 4009.9 4953.1

Fitch Comprehensive Income 4009.9 4953.1

2. Rationale behind the project:

HUDCO is in the business of borrowing fund at the lower rate and lending it at higher rate through this it makes profit. As per the last two fiscal year balance sheets (2008-09) HUDCO’s loan and interest in foreign currency amounted to Rs 780.5748 crore and Rs 705.83 crore respectively and for the present fiscal year (2010-2011) HUDCO needs a borrowing of Rs 5000.00 crore. The borrowing program would include long FCNR(B) loans, borrowings from banks denominated in equivalent foreign currency, borrowings from multilateral institutions / international agencies etc. So the borrowing makes the biggest impact on the profit of HUDCO.

Initially when only HUDCO was there in the housing and infrastructure sector the interest rate spread was high so the impact of the borrowing cost was less visible on the profit, but after liberalisation when all the banks and FIs entered in this sector the profit margin got squeezed so a little increase in the borrowing cost also has a big impact on the profit.

This borrowing raised from financial institutes need a prudent treasury management and for that HUDCO requests different banks like Bank of Scotia, PNB, State bank of Travancore to go for forward agreements on the foreign currency exchange rate mainly USD / INR exchange rate

These forward agreements and FCNR loan charged using London interbank offer rate (Libor) impacts on the interest spread of HUDCO and thus on the profit of the organization. So this gives an opportunity to look into the currency exchange and the hedging policies adopted by HUDCO that impact the HUDCO’s lending rate and to give an outlook on the dollar price for the current fiscal with few more options to raise the international fund.

DATA-COLLECTION METHODS

The task of data collection begins after a research problem has been defined and

research design has been chalked out. The factors like availability of time,

money, human involvement the foremost sampling

Units affect the reliability of the data collection.

There are mainly two types of data:

1. Primary Data

2. Secondary Data

PRIMARY DATA are those data, which are collected fresh and for the

first time. The methods of collecting primary data are Observation'

Method, Interview Method, Questionnaire Method and Schedules.

SECONDARY DATA are those data, which have been already collected by

someone else have been passed through statistical process & may have been

used, in previous researches.

SOURCE OF DATA

The secondary sources of data like the profit and loss account, balance sheet,

etc. were supplied by the finance department. Using this data, ratios were

calculated and analyzed. These data and other financial highlights for the

past five years were used to calculate the storage periods of the components,

which make up the operating cycle.

The secondary sources of data are:

Annual reports

Websites

Various publications

Magazines

3. Methodology:

For analysing the currency risk faced by HUDCO, the first thing that is required is to understand how foreign currency loans are being borrowed. After understanding that criteria we look at the hedging policies used by HUDCO to counter the exchange rate fluctuations. After that we will look at the different business environments of countries that will impact the USD / INR pair for the existing fiscal year thus impacting the cost of international loans. Then we will try to look on the new route that can be adopted for borrowing the international loans. Finally few recommendations are given on the hedging policies that can be adopted by HUDCO for the upcoming years. In a nutshell the following thing will be adopted

Understanding the route of the foreign currency loan, by HUDCO & the major Financial Institutions that acts as lender to HUDCO along with their criteria used for interest rate calculations.

Analyse the prudent policy adopted by HUDCO to face the currency exchange rate fluctuations.

Looking on various macroeconomic indicators to give an outlook on the USD / INR exchange rate that will help HUDCO to fix the forward exchange rate for the new borrowings.

Analyse a new route that can be adopted to raise the international loan. Suggest solution to the currency risk problem: After finding out the weak

points of HUDCO the root-cause analysis will be done and finally suggestions will be given for HUDCO so that the interest spread of HUDCO can improve.

4. Understanding the borrowing of Foreign Currency LoanForeign currency loan are picked as FCNR(B) loan and through bilateral or multilateral loans route from US Capital market, Asian development bank and Japan Bank of International Cooperation(JBIC). All these loans use LIBOR to calculate the interest amount. How LIBOR is used by FIs and how they calculate spreads will be seen later. First we will look at FCNR(B) loans which have been the preferred route for many corporate for working capital requirements and so is for HUDCO, so let us first look at the FCNR(B) loans:-

4.1 FCNR(B) Loans: FCNR(B) loans are a low cost, short-term funding source available to Indian corporate. Banks have been permitted to provide foreign currency denominated loans to their customers from the resource mobilized under the FCNR(B) scheme. Loans are generally denominated in the four currencies in which FCNR deposits are accepted viz. US Dollar, Euro, Japanese Yen & Pound Sterling, and the US Dollar being most popular currency of choice.

FCNR(B) loans are picked by HUDCO from many banks like State bank of Travancore, J&K bank, Bank of Baroda etc among them big loans from banks during last three years are:-

Availing the FCNR(B) loan in US Dollar equivalent to Rs 100.00 crores from State Bank of Travancore charged at the rate LIBOR plus 300 basis points (with reset of LIBOR every six months) for a tenure of two years to be repaid as per amortization schedule applicable to the domestic rupee loan.

Availing the FCNR(B) loan in US Dollar equivalent to Rs 65.00 crores from South Indian Bank Limited charged at the rate LIBOR plus 250 basis points (with reset of LIBOR every 06 / 12 months) for a tenure of sixty six months (subject to roll over every 06/12 months) to be repaid as per amortization schedule applicable to the domestic rupee loan.

Availing the FCNR(B) loan in US Dollar equivalent to Rs 612.50 crore & Rs 200 crores from Bank of Baroda & Vijaya Bank respectively as per the details / terms & conditions contained in the agenda note and bank’s offer letter.

To calculate the cost of loan let us look at a small example. Say HUDCO can avail rupee credit at 14% p.a. Alternatively, HUDCO can avail FCNR(B) loan. HUDCO also knows that as per Indian foreign exchange regulations FCNR borrowers can buy foreign currency forward in FX market. Usually the four currencies in which the FCNR loans are availed are at a premium to the rupee in the forward market. The borrower, therefore, has to pay a premium to buy the foreign currency forward. So the cost of a 6-month Dollar FCNR(B) loan is as follows:

Date of Draw down 16/05/20XX

6 Month $LIBOR (%) 6.98

Bank’s Margin (Spread over LIBOR – assumed) %

2.00

Cost of forward cover (annualised %) 2.50

Other transaction costs % 0.52

Net Rate (%) 12.00

The comparative cost advantage is evident as it results in a net saving of 2%, on a fully hedged basis, over the rupee cost of funding.

4.1.a Risk involved in FCNR(B) LoansThere are few risks involved in FCNR(B) Loans and they are:-

Foreign Exchange risk- risk of rupee depreciation against the currency of loan as the principal and the interest have to be repaid in the foreign currency in which the loan is denominated.

Interest rate risk- risk of the benchmark interest rate (LIBOR) being reset higher e.g. one year loan with interest rate fixing (reset) every three months.

So HUDCO has to take note of the fact that the loan is an advantage only when the overall cost of forward forex plus interest cost in foreign currency is less than the rupee cost of funds.

4.2 LIBOR: London Inter Bank Offer rate is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank market). Each market day, the British Banker's Association (BBA) releases the a single London Interbank Offered Rate (LIBOR) that tells investors the average price banks are charging each other for U.S.-dollar denominated loans. It is a trimmed average of inter-bank deposit rates offered by designated contributor banks, for maturities ranging from overnight to one year. To calculate LIBOR spread every day BBA surveys 16 different banks to find out what rate each one is charging for its overnight loans made to other banks. Naturally, each bank is going to have a unique rate it is charging so let’s say the Bank of Tokyo-Mitsubishi UFJ Ltd. and UBS AG are charging the highest rates---0.73 percent---while JP Morgan Chase is charging the lowest rate---0.62 percent. The difference between the highest rate---0.73 percent---and the lowest rate---0.62 percent---is the LIBOR spread, which in this case is 0.11 percent (0.73% - 0.62% = 0.11%).

To calculate the net rate another spread is charged over LIBOR and this is based on the rating of borrower also. HUDCO though has a credit rating of AA+ by ICRA and CARE but the criteria by banks are bit different for calculating their lenders credit rating. The higher the rating the lower the spread and lower the rating the higher the spread.

For example HUDCO borrowed a loan from US capital market that charged interest using 6 month LIBOR for US $ + 0.18% p.a. (Repayable from March 2010 to September 2029).

4.2.a Risk involved in LIBORThe LIBOR spread is the indicator of creditability of banking sector, if the spread is less it indicates that banking sector have enough potential to pay back the loan and if the spread is high then the pay back potential is questionable. The economic conditions prevailing like liquidity crunch, inflation, and stimulus policies etc contribute majorly in deciding the spread. So if HUDCO borrows a loan at 6 month LIBOR rate meaning the rate will revise after every 6 months, it faces the risk of shooting up of LIBOR at the time of revision. The rate may even go up way above the normal prevailing Indian bank rate. Also when the loan is borrowed the prevailing conditions may drastically change within a day or two after borrowing and thus raising the cost of borrowing and squeezing the profits. In nutshell LIBOR is going to act as a floating rate, which is being sailed by the economic conditions prevailing throughout the world.

4.3 Bilateral LoansOfficial borrowings that include borrowings form national development agencies such as the United States Agency for International Development (USAID), the United Kingdom’s Department for International Development (DFID), and Germany’s Kreditanstalt für Wiederaufbau (KfW) and Deutsche Investitions- und Endtwicklungsgesellschaft (DEG).

HUDCO borrowings are mainly from USAID and JBIC. The table below shows the loan amount taken by JBIC and US capital market by HUDCO in Financial year 2009-10: -

Loan from Amount Remarks

JBIC Rs 237.56 Crores Repayable from Jan 2006 to July 2023

US Capital Market Rs 42.51 Crores Repayable from March 2010 to Sep 2029 at 6 months LIBOR for US $ + .18% p.a

US Capital Market Rs 90.28 Crores Repayable from March 2011 to Sep 2030 at 6 months LIBOR for US $ + .035% p.a

4.4 Multilateral loansMultilateral loan are borrowing from Multilateral lenders, these lenders consist of the International Monetary Fund, the World Bank, Asian Development Bank(ADB), the regional development banks (RDBs, which include the Inter-American Development Bank), and other smaller institutions. The multilaterals each have different mandates in accordance with their charters or articles of agreement, and this affects their lending policies. For example, the IMF’s mission of supporting adjustment to external payments imbalances should imply a specific pattern of lending flows, heavily influenced by the external financial position of its member countries

Multilateral loans are sometimes considered more costly in terms of red tape and conditionality (when the borrower sees the latter as a burden) but cheaper in terms of the interest rate charged. Borrowing from a multilateral generally involves detailed discussions about the intended use of the funds, conditions regarding promised economic reforms or other matters, and extended negotiations on many details of both the loan and possibly the macroeconomic environment.

HUDCO mainly borrows from Asian Development Bank using LIBOR only thus faces the same risk as explained above under risk faced using LIBOR.

In 2009-2010 fiscal HUDCO borrowing was Rs 335.48 Crores from ADB using 6 months LIBOR for US $ plus 0.40% per annum.

The following graphs tells the story of HUDCO borrowing under various routes as shown in the balance sheet of the year 2009-2010: -

5 HUDCO’s Hedging PolicyHUDCO mainly opts for plain vanilla SWAP or booking of forward currency rate. Lets discuss both of the strategies adopted by HUDCO.

5.1 Plain Vanilla SwapA fixed to floating interest rate swap is considered as plain vanilla swap.

For example HUDCO borrowing from US Capital Market Rs 90.3 Crores repayable from March 2011 to September 2030 @ 6 month LIBOR for US $ + .035% p.a. So HUDCO went for a plain vanilla swap with Export Import bank (EXIM Bank) where it will pay EXIM bank at 12.5% and EXIM bank will pay to USAID at LIBOR + .035%. Risk Involved in swap is if Dollar depreciates HUDCO is paying more from its pocket and EXIM is reaping the benefit and if it appreciates EXIM is shaving out more money and HUDCO is reaping the benefit.

HUDCOHUDCOHUDCOHUDCO EXIM EXIM BANKBANK

EXIM EXIM BANKBANK

Paid @ LIBOR + .035%

USAIDUSAIDUSAIDUSAID

Swapped @ 12.5%

Borrowed @ LIBOR + .035%

HUDCO pays at fixed % & EXIM at floating to USAID

5.2 Forward Rate BookingIn repayment of FCNR(B) loans HUDCO generally books the forward rate for dollar value. Looking at the different macroeconomic indicators as explained in section 6, HUDCO fixes a future a value of USD in terms of INR with different banks like Bank of Baroda, State Bank of Travancore. This helps HUDCO to hedge its risk from various instabilities’ present in the economy or any downturn going to happen in near future.

For example a FCNR(B) loan is borrowed by Bank of Baroda, details as shown:-

Now HUDCO needs to pay every month an interest calculated using at LIBOR plus the spread and has to pay back in dollar, so to counter the currency rate fluctuations HUDCO goes for a forward rate agreement on Dollar rate with banks. It fixes a dollar value for a coming date say with State Bank of Travancore and purchases the dollar at that value on the respected date from the agreed bank. The purchased dollars are used to pay Bank of Baroda. This is how

Bank of Baroda

Lends INR 98.9875 Crores

(USD 25 million)

For 3 years

@6M LIBOR + 300 Bps

Payable Monthly

1 USD = INR 39.5950

Dated 13/02/2008

forward rate agreement works. And higher the fluctuations in exchange rate higher the risk involved.

6 Outlook on USD/INRAs explained above HUDCO needs to go for Swaps for hedging its risk. So a sincere attempt is made in this part to give an outlook on where the USD/INR pair will head in these fiscal years and what are the factors that will govern the exchange rate. To begin with we will look at the recent trend (till 5th May 2010) of USD/INR exchange in this fiscal year.

6.1 Dollar BehaviourThe US currency is currently 7% stronger than it was when the gold price peaked on its index (a broader measure of the dollar’s strength).

The Euro is weakening and thus helping Dollar. As seen the Greek crisis is not going to be resolved soon and if Greece goes into a debt traps than dollar will gain from it. Talking dollar with respect to Indian rupee the present scenario is shown in the graph

The US Dollar ended sharply dearer against the Rupee at Rs 45.55 per dollar on 5th May 2010.

But the overall sentiment for the US dollar in 2010 is mostly bearish against the other majors. On closer analysis, the recent strength in the dollar isn't backed by fundamentals. Unemployment and budget deficits are at record highs and home prices are still falling. Debt has also shot through the roof with the government's massive stimulus spending.

Based on above fact US dollar will keep on fluctuating and once EURO problem is solved it will again dip down backed on the fact that the current US debt is $15 trillion and projected to rise, also on the fact that unemployment is currently 9.7%.

6.2 Greece Debt CrisisEveryone is very jittery on what is going on over in Europe, especially in Greece, and if there is going to be contagion to Spain and Portugal and how that affects the whole global banking system. The struggle of Greece and others such as Portugal, Spain and Ireland to manage mountain of debt along with reluctance of Germany to take its traditional role of EU pay master has let EURO fall against dollar. Even the question on sustainability of monetary union is also being raised.

Exporters are going slow on booking orders from Europe as a weakening euro increases risk and hits profits. The Wall Street is shaken so are the global share markets. Investors saw stock gains for the year erased in a harrowing five days of trading that pushed major indexes down by 6 percent to 8 percent. 

The euro dropped against all 16 most-actively traded counterparts this year as the region’s debt crisis deepened. Thus the Crisis is a blessing for the Dollar. Thus the falling stock market is making investors to bend more towards Dollar and thus strengthening the value of Dollar.

6.3 Strengthening of Indian Economy and INRThe rise of 25 basis points each in the key policy rates (Repo and Reverse Repo) and Cash Reserve Ratio, by Reserve Bank of India (RBI) pushed the yields to 8.1% for the 6.35% 10-Yr G-Sec bond. The government released the new 10-Yr G-Sec bond, which registered a bullish cut-off of 7.80% as against the market expectation of 7.85%. 

Monthly Market Roundup

Close Change

% Change

BSE Sensex 17,558.7

30.9 0.2% 

S&P CNX Nifty

5,278.0

28.9 0.6% 

CNX Midcap 8,061.1

356.2 4.6%

Gold (Rs/10 gram)

17,025.0

705.0 4.3%

Re/US $ 44.4 0.4 1.0%

Crude Oil ($/BBL)

85.7 4.4 5.4%

10-Yr G-Sec (%)

8.1 0.2 3.1%

1-Yr FDs 5.00% - 6.50%

(Monthly change as on April 30, 2010)

The graph here under clearly depicts that while equity markets did correct on account of Greece and Spain’s sovereign debt rating being downgraded by S&P to ‘BB+/B’ and ‘AA’ respectively, the Foreign Institutional Investors (FIIs) continued to show investment confidence towards India, on account of good

GDP growth rate (8.0%) projected by RBI (in its Annual Monetary Policy for 2010-11) and also due to IMD’s forecast of normal monsoon.

FIIs were net buyers of equities to the tune of Rs 11,477 crore in the month of April 2010 as compared to Rs 19,928 crore (net buyers in equity) in the month of March 2010.

BSE Sensex vs FII inflows

(Source: ACE MF)

February 2010 IIP (Index of Industrial Production) numbers declared in the month of April 2010 also did enthuse the FII activity. The Index of Industrial Production (IIP) for February 2010 grew by 15.1% over last year's figure (February 2009). According to the quick estimates released by the Central Statistical Organisation (CSO), the rise in IIP was broad based and was on account of:

Strong manufacturing growth – The manufacturing index, which is the principal component of the IIP, grew by 16.0% over the last year.

Robust expansion in output – Output of capital goods grew over the last year by 44.4%, followed by growth in output of intermediate goods and consumer goods of 15.6% and 8.9% respectively

All the above factors are appreciating the value of Indian Rupee, thus increasing its purchasing power. And this appreciation will cap the rise of dollar keeping the value in a band and not allowing it to shoot up.

6.4 China High ReservesChina found itself with large $ reserves once it embraced Capitalism more than 15 years ago. Then the reserves turned from large to huge. This was a worry, so measures had to be taken to manage such money, so spending on imports to assist in the development of the country was instituted, foreign investments were allowed and encouraged and all was well, but still the reserves grew far beyond the pace of the ability to use them and keep them in proportion to requirements.

In October 2006, China's foreign exchange reserves exceeded USD1 trillion for the first time. By the end of September 2008, the reserves topped USD 1.9 trillion, equal to nearly USD1, 500 per head for the entire population of China. It remained around this level until the end of 2008 as trade growth slowed and foreign investment inflows declined. 

Then, as 2009 progressed, the upward march resumed, with reserves rising above USD2 trillion in April and reaching a record USD2.447 trillion at the end of March 2010.

China has about 70% of its foreign exchange reserves in the U.S. $ but is adding to overall reserves at the rate of U.S.$15-20 billion per month. To diversify away from the dollar, the Chinese authorities could ensure that all non-U.S. transactions are denominated in currencies other than the U.S.$ even accepting the local currency of the nation it is trading with?

China invested in Gold and demand continued to strengthen. Today, China’s gold market is enjoying the benefits of liberalisation and deregulation. Gold consumption in China has been on the rise due to the country’s rapid economic growth and the continued improvements in living standards of its population. The increase in demand of Gold is weakening the dollar value.

6.5 China Yuan PolicyThe US President Barack Obama is facing a big question, whether to declare “China a currency manipulator or not”. Same as President Nixon in 1970’s declared “Japan a currency manipulator” thus taking US into deeper trouble. China effectively re-pegged its currency some 20 months ago around 6.83 to the dollar as the financial crisis spread. This helped China to keep its exports cheap and get benefited even when world was global crisis. If China starts strengthening its Yuan it will make imports cheaper and exports dearer this could also be seen as tightening measure that would temper Chinese growth in the medium term. But it is being pointed out that US is so much dependent on Chinese Products that they have stopped manufacturing it in their country and have no option other than purchasing the imported products. So if exports get dearer ultimately US will only be affected thus deepening its Trade Deficit and weakening Dollar.

On the other hand if China shows reluctance to let the Yuan rise will increase the risk of fuelling inflation and also increasing tension between Beijing and Washington. The US could take action and if it declares it a currency manipulator and in counter China throws its excess dollar in market, the dollar will hit the sea bed thus affecting the US economy and also China’s own BOP with other Dollar-Yuan linked economies. This situation is unlikely to happen.

6.6 China Economy may CrashThe Shanghais Composite Index failed to regain its 2009 high and slumped 12% this year. The opening of “World Expo in Shangai” last week is not considered as good omen as it is being cited as 1873 World Exhibition in Vienna after which property bust and depression followed.

Some investors are forecasting China economy to slow down and even warning crash in 9 to 12 months. The reasons cited are 60% of the country’s GDP relies on construction. So a debt-fuelled bubble in China may trigger a regional recession within a decade. The government has banned loans for third homes and raised mortgage rates and down payments requirements for second home purchase. Prices rose 11.7% across 70 cities in March from a year earlier. Three largest banks are trading near their lowest valuations on record as rising profits are eclipsed by concern bad loans will increase.

So if economy slows down or unfortunately crashes US will be in the commanding position as US market is the biggest export market to China and China cannot lose the market, at any cost. Thus strengthening of dollar and China obeying US is bound to happen.

6.7 Conclusion on USD/INRPresent scenario shows that Dollar is strengthening due to EURO crisis. EURO crisis is also the reason behind the fluctuation of Stock exchange indexes all over the world. But at the same time the high unemployment & high trade deficit will weaken the value of dollar. A surge could take place if China economy as speculated crashes. But over a longer run USD compared to INR will fall. SO HUDCO should wait a bit for entering into USD/INR agreements as present exchange rate will not reap any benefit to the corporation, as Dollar is very powerful. On the other hand waiting for few more days will allow HUDCO to reap the benefit of INR strengthening over USD and thus making its pocket heavy.

7 Suggesting a New Route of BorrowingApart from the existing route HUDCO can take a new route of purchasing whose cost of borrowing is less compared to the existing FCNR(B) loan. The two routes are External commercial Borrowing (ECB) or Foreign currency convertible bonds (FCCB). Let us discuss the two routes one by one.

7.1 External Commercial Borrowing External Commercial borrowing (ECB) is a term used to refer to commercial loans availed from non-resident lenders with a minimum average maturity of 3 years in the form of bank loans, buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes and fixed rate bonds). A company is free to raise ECB from any internationally recognized source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. However, offers from unrecognized sources are not entertained. The Government is permitting ECBs as a source of finance for Indian Corporate for expansion of existing capacity as well as for fresh investment.

How HUDCO can avail loan through ECB?

ECB can be accessed under two routes viz Automatic Route & Approval Route. Under the Automatic Route, the approval of Reserve Bank of India (RBI) or the Governments approval are not required. However, in case of doubt regarding eligibility under the Automatic Route, applicants may take recourse to the Approval Route. Under Automatic route eligible borrowers are hotel, hospital, software sectors (registered under the Companies Act, 1956) except financial intermediaries, such as banks, financial institutions (FIs), Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs) while under Approval Route eligible borrowers are FIs dealing exclusively with infrastructure or export finance, Banks, NBFC and FIs.

So HUDCO can avail the ECB through Approval Route.

7.1.a ECB Approval RouteECB for investment in real sector-industrial sector, infrastructure sector in India and specific sectors, which poses some doubt with regard to eligibility to access the Automatic route, takes the Approval Route for ECB.

7.1.b Amount & MaturityHUDCO can borrow up to USD 750 million with average maturity of more than 10 years during a financial year. Other ECB criteria, such as end use etc, need to be compiled with. Prepayment and call/put options, however, would not be permissible for such ECB up to a period of 10 years.

7.1.c All-in-cost ceilingsAll-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The all-in-cost ceilings for ECB are reviewed time to time. The following ceilings are valid until reviewed:

Average Maturity Period All-in-cost Ceilings over 6 month Libor

Three years and up to five years 300 basis points

More than five years 500 basis points

7.1.d End UseECB can be raised by corporate engaged in the development of integrated, Integrated township includes housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges, mass rapid transit systems. Development of land and providing allied infrastructure forms an integrated part of township’s development. The minimum area to be developed should be 100 acres for which norms are to be followed as per local byelaws / rules. In the absence of such bye-laws/rules, a minimum of two

thousand dwelling units for about ten thousand populations will need to be developed.

Utilization of ECB proceeds is not permitted in real estate. It is also not permitted for working capital, general corporate purpose and repayment of existing Rupee loans.

7.1.e Recent TrendsRecent trend indicate that the important aspect of ECB policy is to provide flexibility in borrowings by Indian corporate, at the same time maintaining prudent limits for total external borrowings. The guiding principles for ECB Policy are to keep maturities long, costs low, and encourage infrastructure and export sector financing which are crucial for overall growth of the economy. The ECB policy focuses on three aspects: eligibility criteria for accessing external markets, the total volume of borrowings to be raised and their maturity structure as well as the end use of the funds raised. It is interesting to note that the trend of how ECB has evolved and played a greater role in the Indian economy under the surveillance of RBI and the Indian government. In its initial stages, the Government had operationalised the automatic route for fresh ECB approvals up to USD 50 million and for all refinancing of existing ECBs with effect from September 1, 2000. However, at present the maximum amount of ECB that can be raised by an eligible borrower under the Automatic Route during one financial year is USD 500 million.

From April to December 2006, ECB flows were USD 9 billion: a billion dollars a month and from January to March 2007, ECB flows have been close to USD 13 billion, this reflects the rise in commercial borrowing by Corporate and other institutions and the liberalized policy of the Government towards borrowing from overseas source.

7.2 Foreign Currency Convertible Bonds (FCCB)The present disinvestment policy of Government is making HUDCO to come up with its IPO. The rollout is in processing stage and will come out very soon. This will help HUDCO to go for FCCB as its borrowing route.

FCCBs mean a bond issued by a company expressed in foreign currency, and the principal and the interest in respect of which is payable in foreign currency. The bonds are required to be issued in accordance with the scheme viz., “Issue of FCCB and ordinary shares (through Depositary Receipt Mechanism) Scheme 1993”, and convertible into ordinary shares of the issuing company in any

manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments.

HUDCO being an HFC and is coming with its IPO can use this route too. As per the guidelines FCCBs by housing finance companies satisfying the following minimum criteria:

The minimum net worth of financial intermediary during the previous three years shall not be less than Rs 500 crore,

A listing on the BSE or NSE, Minimum size of FCCB is USD 100 million, The applicant should submit the purpose/ plan of utilization of funds.

HUDCO can be benefited by the ECB under approval route or taking FCCB route and can raise loan up to USD 750 million during a year.

7.3 Benefits of ECB/FCCB

ECB route provides an Indian company with the foreign currency funds that may not be available in India; the cost of funds at times works out to be cheaper as compared to the cost of rupee funds and the availability of the funds from the International market is huge compared to the domestic market. Moreover HUDCO can raise a large amount of funds depending on the risk perception of the International market. The following are the benefits of ECB over FCNR(B):

a. Direct tapping of international market, as an intermediary the bank is removed thus lowering the interest rate. In FCNR(B) the net interest rate = LIBOR + LIBOR Spread + Bank Charging Rate while in ECB net interest rate = LIBOR + LIBOR Spread, so we can see that the extra Bank charging rate, which depend on Corporate credit rating and few more factors, is removed thus lowering the cost of borrowing.

b. In FCNR exposure to banks is less compared to ECB so the net amount available for ECB is far more than FCNR.

c. The rules in FCNR is stringent compared to ECB as in FCNR collateral, creditworthiness, rating etc is taken care while ECB is very liberal compared to FCNR(B) loans.

d. It will enable HUDCO to become a global player by facilitating their overseas direct investment, permitted end-use for ECB was enlarged to include overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS). This would facilitate HUDCO to undertake fresh investment or expansion of existing JV/WOS including mergers and acquisitions abroad by harnessing resources at globally competitive rates.

e. HUDCO a housing finance company, with approval from the Reserve Bank of India, would be allowed to issue foreign currency convertible bonds.

8 Suggestions for HUDCO

By looking at the analysis it can be noted that high dependence on the limited avenues has resulted in higher cost of borrowing for HUDCO. At the same time high dependence on the single route limits the negotiation ability that also leads to high borrowing cost. So if different routes and different strategies are taken up by HUDCO it can increase its profit margin and at the same time can reduce the impact of exchange rate fluctuations. Following are the suggestions that the project came up for HUDCO:-

Emphasis on the internal research and market information: HUDCO needs strengthening of internal research and market information. It always acts in the market according to the short term need and never borrows according to the market situation. Financial market is very dynamic in nature, timings of the opportunities are uncertain. But if focus is given on internal research and market information uncertainties can be predicted. The prediction can help HUDCO to tap the opportunity and make long-term policy for the organisation.

Unexplored Financial Products: Financial sector is very dynamic in nature. The useful financial product for the organisation changes according to the market condition and the timing. HUDCO can explore the possibility to raise the resources from following sources according to the market condition so that it can minimise the cost of funds.

Commercial Paper for short-term liquidity mismatches. Repo or G-sec linked loans from banks. Taking the advantage of

RBI`s Liquidity Adjustment Facility (LAF) window banks offer repo related loans to corporate that changes in co-ordination with the repo rate.

IPO – Equity is a cheap source of money for HUDCO. HUDCO should try to launch IPO at appropriate time so that it can command for a good premium. The premium obtained can better the financial health of the organisation as well as reduce the borrowing cost.

Strengthen Treasury: HUDCO`s resource are not mapped with project lending fully so HUDCO use to raise some extra fund. But HUDCO treasury is not well equipped to handle the surplus for two to three months or more, so most of the extra funds are put as fixed deposits in the bank. Fixed deposits will always lead to lesser returns as it is the bank who has lend the money and in fixed deposit the bank itself is taking investment so returns are less. So by having a proper treasury fully devoted for the managing extra funds can results in better return on the extra funds. Some of the Instruments that HUDCO can explore to park its extra funds are as follow.

Commercial papers for the short-term investments. Liquid Funds – Mutual Funds have floated liquid plus schemes, which

are essentially treasury instruments. Under these schemes apart from call money, funds are invested in money market instruments like G-sec, commercial paper etc. The advantage of scheme over bank FDs is the tax aspect. Interest income on fixed deposits is taxed at 33%, but the dividend distribution tax, which funds deduct before handing over dividend to investors, is at 22% for corporate and 14% for individuals on liquid plus schemes. The instrument is available for one to any number of days and this gives the flexibility to the treasury manager until the tax arbitrage on Liquid plus Scheme is not done away with by the government.

CBLO: “Collateralised Borrowing and Lending Obligation” is popularly known as CBLO.  It is recently developed money market instrument in India by CCIL. RBI approves this instrument. CBLO is for the benefit of the entities who have either been phased out from interbank call money market or have been given restricted participation in terms of ceiling on call borrowing and lending transactions and who do not have access to the call money market.

G-Sec: G-Secs are issued to the market through an auction or on-tap. The details a G-Sec issuance are announced about 3/4 days in advance. Typically, the RBI holds a G-Sec issuance every 2/3 weeks and the frequency is usually higher in the first half of the financial year (April-March). The bonds offered are either new securities or reopening of earlier issuances.

Increasing Fee Based Income: The main source of fee-based income is management development program and consultancy. HUDCO being very old organisation in its sector has got the ability to provide wide spread of consultancy in housing and infrastructure sector. The increment of fee-based income is very important especially in the time of squeezed interest spread. If circumstances and macroeconomic environment is not favourable then this fee-based income provides cushion to the organization. By increasing fee based income HUDCO can improve its operating efficiency, because for fee based income employees is needed and the employee`s expenditure is already happening so no extra expenditure will happen but the total income will improve. So by increasing fee-based income HUDCO can improve its operational efficiency.

Hedging partially the foreign currency loan amount: Instead of hedging fully the foreign currency loan we can partially hedge the loan amount, opening up the interest and covering up the principle amount of loan. That is the principle is hedged using SWAP or forward rate agreement while the interest amount is exposed to exchange rate fluctuations. This would benefit us in two ways, first the bigger amount i.e. principle amount is hedged so the market behavior will not hit much to HUDCO. Second, since the interest amount is exposed to currency risk, it will face up and downs but the present situation says that dollar will go down so the strategy will reap the benefit in longer run. Thus increasing the profit margin of HUDCO.

Appendix

Financial Statements of HUDCO.

1.Unsecured Loans: Amount are in Rs. Crores

Particulars FY 2009  FY 2008

       Debentures 147   228Bonds 6292.6   6589.6Special Taxfree Bonds 353.1   353.1Bonds Subordinated debt Under TIER-II Capital 7145.7   7442.7Loan from GOI 53   53

Loan from FIs       General Insurance Corp. 69.9   126.1National Housing Bank 315.6   400LIC 123.3   283.3Total 508.8   809.4       Loan from various Banks 4479.5   8070.5Public Deposits  2202.9     1665.7       Loan in foreign Currency  Loan from JBIC(Repayable from Jan 2006 to July 2023)-Swapped in two tranches with SBI 127.1 135-Swapped in one tranche with ICICI 36.4 44.8-Unswapped portion of JBIC 74.1 79.4

Total 237.6 259.1

     Loan from ADB 335.5   376       Loan from US Capital Market 132.8   145.5 (Guaranteed by USAID & counter Guaranteed by Canara Bank)             Total (reported) 15243.1   19050.2

2. Balance sheet Analysis:

 31-Mar-10  

31-Mar-09

Balance Sheet as per Annual Report 21119.0   24152.0Add: Current Liabilities 1126.5   1289.6Less: Deferred Tax Liabilities (Net) 234.4   234.4Less: Misc. exp not written-off 0.0   20.3Asset Deployed 22011.8   25186.9                            Loans 19071   21427Other Loans and advances 564.3   526.2Investments (bonds) 1523.9   2043.2Cash & Bank Balances 711.2   1052.4Interest Bearing Advances 21870.4   25048.9       Secured Loans 189.5   199.2Unsecured Loans 15243   19050Interest Bearing Liabilities 15432.5   19249.2

BIBLIOGRAPHY:

1.www.basixfx.com

2. www.rbi.org

3. www.indlaw.com

4. www.hudco.org

5. www.economictimes.com

6. www.nseindia.com

7. www.bseindia.com

8. www.tradingeconomics.com

9. Bureau of labor Statistics