Chennai-based Indian Bank, which had plans to raise $1 billion in two tranches during the current financial year though MTNs, has deferred its plans and will wait till the market condition improves. The state-run bank has opted for the line of credit option to meet its funding requirement.

“If we go for raising funds through the MTN route, we will have to find assets immediately else, the cost of keeping the money idle will be very high. So, we have opted for the line of credit route,”

T M Bhasin, chairman and managing director of Indian Bank, told Business Standard.There has been a moderation in growth owing to monetary tightening by the Reserve Bank of India (RBI). Apply for Credit Cards Online

The markets worldwide have been jittery recently due to the euro zone crisis and the US downgrade. According to a recent report by ratings agency Crisil, the Indian corporate sector fears a credit freeze in advanced nations, which could impair their ability to raise debt and roll it over. “We can get credit up to $500 million through foreign banks as and when we require it. This is far more cost-effective in an environment where we need to protect our net interest margins. Hence, instead of the MTN route, we have opted for the line of credit route,” Bhasin added.

The cost of funds for the banks has been rising due to RBI's monetary tightening. The interest rates are nearly 300 basis points higher than the foreign markets which have made the banks to hunt for foreign funds.

Another state-run lender, Union Bank of India, has shelved its plans of raising $300-500 million by September through MTNs for the time being, due to unattractive high yields being demanded by the investors. “The credit spreads have widened significantly. Indian banks generally leverage the spreads between the borrowing and lending cost. In view of this, it is not attractive in the present scenario to raise funds for onward lending,” said V K Khanna, general manager (treasury) at Union Bank. The bank would consider raising funds as and when the markets and pricing become attractive, Khanna added.

Lenders prefer taking loan in tranches for meeting their short-term funding requirements. Banks are not keen on giving credit guarantee now.

IDBI Bank is another lender that was looking at raising funds overseas through MTNs but has put its plan on the back burner for the same reasons as above. “Yield is not very attractive for us at the moment. The rate at which we want to borrow must meet the lenders' expectations. So, till the market conditions improve we will not be looking at raising funds overseas,” Chief Financial Officer P Sitaram said.