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Why you should care to read this GK article?
Assuming that you are preparing for bank recruitment tests, you should realize that there is a section on General Awareness that tests if you are aware of the happening around you. The happening on Economy, Sports, Industry, Trade and Policies. Who would assume that you will be a prospective bank hire without knowing the fundamentals of General Awareness? So, it is high time that you started taking the GK-in-Depth articles, the Daily GK and the Weekly GK diligently. You are shown the resources, it is on you to utilize them.
What are Samurai loans?
Samurai loans are Yen-denominated Cross Border Syndicated Loan for non-Japanese borrowers. The increase in popularity of samurai loans can be ascribed to relatively low pricing due to ample liquidity of Japanese investors and their willingness to consider lending to unrated and/or unlisted borrowers from overseas.
What is the connection between Samurai loans and India?
News that Reliance Jio has raised 53.5 billion Japanese yen (approximately Rs 3,251 crore) in Samurai loans. There are important takeaways for the infrastructure sector from this Samurai loan.
- Tapping into Japanese investors provides infrastructure businesses in India with an opportunity to access a large pool of capital that is looking for returns in a low interest rate environment making the capital transfers through Samurai loan-type transactions is an area that deserves attention.
- Even factoring in for hedging costs, such transactions allow companies to borrow cheaper than a similar loan in India. Reliance Jio's Samurai loan allows it to borrow in a relatively low interest rate currency such as the yen and eventually swap the yen back into rupees to fund investments at home.
- Most importantly, it opens up a large pool of capital in Japanese institutions and retail investors.
Ageing population in Japan, Abenomics, Robust business models, higher interest yields – The connection
To get an idea of why Japanese investors, who have traditionally invested largely in Japanese government bonds and equities, might want to start looking at offshore markets such as India, one needs to understand the policy changes and macro-economic conditions in that country, especially over the last few years. "Abenomics", extensive monetary easing by the Bank of Japan and extremely low interest rates have all contributed to the changing macro-dynamics.
The size of assets with Japanese investors is significant, with institutions such as Government Pension Investment Fund (GPIF) having a total of 162.6 trillion yen of assets under management in December 2017. This makes GPIF the single-largest pension fund manager in the world. It is important for India to attract a part of this reallocated capital not just from GPIF but other large Japanese financial institutions.
According to the annual survey by the Central Council for Financial Services Information, a body administered by the Bank of Japan, 54.1 percent of Japanese household financial assets are held in savings and bank deposits, with only 8.9 percent held in stocks.
When one considers Japan's ageing population, one realizes that the demand for fixed coupon paying assets such as bank deposits will only increase in the country. A three-year term deposit earns anything between 1 and 10 basis points in Japan.
This combination of an ageing population and high demand for fixed income assets in a low interest rate country shows demand for high quality interest paying investments in Japan. The fact that the total size of the financial assets held by Japanese households stood at $16 trillion at the end of June 2017, as per Bank of Japan data, gives us an idea of the opportunity for Indian infrastructure businesses.
While Japanese capital is available, it is also discerning. Hence companies need to create robust business models, stable cash flow profiles and corporate governance standards that will satisfy Japanese investors. Over the next two decades, as India looks to create world class infrastructure, structures such as Samurai loans will be needed. As the infrastructure sector gradually recovers, capital structure innovation through channeling Japanese capital into attractive investment opportunities in the years to come will be a must.
Also Read: Finance Commission - Federal Economy