Shriram Finance’s $1.27 Billion ECB Deal Sets Record

Shriram Finance, India’s second-largest non-banking financial company (NBFC), is on the verge of securing a landmark $1.27 billion external commercial borrowing (ECB) deal. This multi-tranche, multi-currency loan is poised to become the largest such transaction by any Indian NBFC. The deal highlights Shriram Finance’s strategic approach to diversifying its funding sources and reflects the growing importance of foreign currency borrowings in the current regulatory environment.

Deal Overview
The $1.27 billion loan comprises multiple tranches with maturities ranging from three to five years. Leading global financial institutions are participating in this monumental deal, including HSBC (UK), MUFG and SMBC (Japan), International Finance Corporation (IFC) from the World Bank Group, DBS Bank (Singapore), BNP Paribas (France), Standard Chartered Bank, and First Abu Dhabi Bank.

According to insiders, the largest component of the deal is a three-year loan valued at $900 million. This triple-currency tranche includes $600 million denominated in US dollars, with the remaining amount split almost equally between dirhams and euros. Additionally, MUFG has provided a three-and-a-half-year bilateral loan of $275 million, while IFC has contributed $10 million via a five-year loan. The loans are expected to be syndicated further among other global banks by early 2025.

Interest Rates and Cost of Borrowing
The $900-million three-year tranche has been priced at 200 basis points (bps) over the three-month secured overnight financing rate (SOFR), which is currently trading at 4.76%. This implies an effective interest rate of approximately 6.76%. Similarly, MUFG’s $275 million loan is priced at 205 bps above SOFR, resulting in a cost of 6.81%. IFC’s five-year loan is the most expensive, priced at 210 bps over SOFR, equating to an interest rate of 6.86%.

These rates reflect the competitiveness of the deal, especially given the global interest rate environment. For Shriram Finance, accessing foreign currency loans at these rates not only provides cost-effective capital but also ensures longer tenures compared to domestic borrowings.

Strategic Implications
The significance of this deal extends beyond its record-breaking size. It underscores the increasing reliance of Indian NBFCs on external financing in the wake of tightened domestic regulations. The Reserve Bank of India (RBI) has recently expressed concerns over the rising exposure of banks to the NBFC sector. Consequently, bank funding for NBFCs has dried up, forcing these institutions to explore alternative avenues such as ECBs.

Foreign currency borrowings present a viable solution for NBFCs, offering several advantages:
Diversification of Funding Sources: By tapping into international markets, NBFCs can reduce their dependency on domestic banks and mutual funds.

Attractive Pricing: Given the competitive interest rates, ECBs often prove more cost-effective than domestic borrowings.

Longer Maturities: Foreign loans typically come with longer tenures, which align better with the asset-liability management requirements of NBFCs.

Umesh Revankar, Executive Vice Chairman of Shriram Finance, confirmed the company’s plans, emphasizing that the funds will be deployed to support its lending business. “This deal helps diversify our funding sources and strengthens our liquidity position,” he said.

Utilization of Funds
Shriram Finance is primarily known for its commercial vehicle (CV) financing business. However, the company is actively working to diversify its loan book. As of September 2024, CVs and passenger vehicles accounted for 67% of its Rs 2.33 lakh crore portfolio. The remaining portfolio comprises loans to micro, small, and medium enterprises (MSMEs), housing finance, and other segments.

The proceeds from the ECB deal will be channeled toward expanding the company’s lending operations, with a focus on increasing its exposure to MSMEs. This strategic shift aligns with Shriram’s long-term vision of reducing concentration risk and capturing growth opportunities in underpenetrated markets.

Market Context
The timing of this deal is significant. Over the past year, the global interest rate environment has been volatile, with central banks across the world tightening monetary policies to combat inflation. Despite this, Shriram Finance has managed to secure competitive rates, demonstrating its strong credit profile and the confidence of international lenders.

In the Indian context, the RBI’s regulatory tightening has prompted NBFCs to reassess their funding strategies. ECBs have emerged as an attractive alternative, offering liquidity at competitive rates. However, such borrowings also come with risks, including currency fluctuations and interest rate volatility. Shriram Finance’s decision to opt for a multi-currency structure mitigates some of these risks by diversifying its exposure across different currencies.

Challenges and Outlook
While the deal marks a significant milestone for Shriram Finance, it is not without challenges. Currency risks remain a critical concern, especially given the volatility in exchange rates. The company’s ability to effectively hedge these risks will determine the net cost of borrowing. Additionally, the rising cost of capital globally could impact profitability margins in the long run.

On the operational front, the success of Shriram’s diversification strategy will depend on its ability to scale its MSME lending portfolio while maintaining asset quality. The MSME sector, though lucrative, is inherently risky due to its vulnerability to economic cycles.

Despite these challenges, the outlook for Shriram Finance remains positive. The company’s strong track record in the CV financing space, combined with its proactive approach to funding and diversification, positions it well to navigate the evolving landscape.

Conclusion
Shriram Finance’s $1.27 billion ECB deal sets a new benchmark for Indian NBFCs. It reflects the company’s robust financial health, its commitment to innovation, and its ability to adapt to changing market dynamics. By securing this funding, Shriram Finance is not only addressing immediate liquidity needs but also laying the groundwork for sustainable growth. As the company diversifies its loan book and strengthens its presence in the MSME segment, it is poised to further consolidate its position as a leader in the Indian financial services industry.

The image added is for representation purposes only