Indian companies cannot complain about the lack of funds anymore. With local banks flush with liquidity and overseas rates also falling rapidly, companies are spoilt for choice with regards to funding.

The London inter bank offer rate (Libor) crashed to a record low of 0.68% on Thursday, and stayed thereabouts on Friday, down from its January 2008 peak of 4.57%. This indicates lending confidence is returning in foreign banks.

Libor is the benchmark rate for lending by foreign banks. Corporate borrowings through the external commercial borrowing (ECB) route are also linked to the Libor.

However, bankers said, though a lower Libor will make borrowing cheaper, it has not necessarily made getting loans easier because the risk appetite of lenders is still low.

In fact, overall external borrowings are lower this year than in 2008. During July 2009, Indian companies borrowed $1.93 billion through ECBs, as against $2.47 billion during the corresponding period last year. Between April and July this financial year, $4.56 billion was borrowed, versus $6.02 billion in the corresponding period in 2008.

Hitendra Dave, head - global markets at HSBC, said the rock-bottom Libor rates are an indication of improved credit appetite among banks abroad. “These are signs that normalcy is returning and inter-bank lending confidence is back. However, banks are still charging high spreads over Libor, which means that companies are still paying more,” he said.

Banks are currently charging 4-5% above Libor, as against the less-than-2% they were charging a few months back.

Forex and risk management consultant AV Rajawade said the high spreads indicate that things are not fully normal and banks are still uncomfortable lending to Indian companies.

The Reserve Bank of India (RBI) has been pushing companies to borrow overseas by allowing them to borrow abroad and spend up to $500 million in India without permission from the central bank.

The government also allowed firms in the services sector, township developers and certain classes of infrastructure lenders to borrow from abroad and spend up to $100 million in India without the central bank’s nod.

“The RBI clearly wants Indian companies to borrow from abroad because of the flight of capital in the last one year, but looking at the pricing and the global situation, it looks difficult,” Rajawade said.

Bankers said foreign banks have ruthlessly cut their counter party limits in light of the global risk aversion, which means there is much less available for Indian companies. A counter party limit is the maximum bank exposure to a country or company.

Joiel Akilan, chief representative of Spanish bank BBVA, said though global banks are flush with liquidity, they are still cautious in lending to countries like India. “They have cut counter party limits and are concentrating on their home markets, which will impact their ability to finance long tenor loans to countries like India. That’s why there have not been many deals in the syndicated loan market for Indian companies,” he said.

Capital goods intensive companies that import from abroad have got a better deal when it comes to financing of loans because foreign export import banks guarantee up to 85% of the loans, making a majority of the loan risk local in nature for the lenders. Companies though have to pay an insurance premium on these loans.

Bankers said external borrowings will pick up once companies readjust their needs after the slowdown. “I think more than the cost it is readjustment after the slowdown (that will trigger a surge in ECBs). Funding is available but the pipeline is still picking up,” Dave from HSBC said.