Indian Economy News

RBI releases framework for external commercial borrowings

Mumbai: The Reserve Bank of India (RBI) on Monday released a comprehensive framework for external commercial borrowings (ECBs) for making it easier for Indian corporates to borrow funds overseas.

The new framework, which has been finalized in consultation with the government, reduces the restrictions on the end-use of funds borrowed overseas and expands the set of overseas lenders from whom funds can be borrowed. Most of these relaxations are likely to apply to long-term borrowings even as RBI continues to keep a check on the quality and quantum of short-term borrowings.

The overarching principles of the revised framework include “a more liberal approach, with fewer restrictions on end uses, higher all-in-cost ceiling, etc., for long-term foreign currency borrowings as the extended term makes repayments more sustainable and minimises roll-over risks for the borrower,” RBI said in a release.

A more liberal approach for rupee-denominated ECBs, where the currency risk is borne by the lender, is also envisaged as part of the new ECB regime. Earlier this year, RBI allowed Indian firms to issue rupee-denominated bonds overseas, termed as masala bonds.

RBI added that it will expand the list of overseas lenders to include long-term lenders, such as insurance firms, pension funds and sovereign wealth funds.

“Based on market feedback, RBI has allowed greater freedom to borrow money. This is part of the larger step towards liberalization of the capital account,” said N.S. Venkatesh, chief financial officer of IDBI Bank. Venkatesh added that allowing long-term investors such as insurance firms and pension funds as lenders would help firms get easier subscribers to masala bonds.

As part of the new norms, RBI has carved out three broad categories of borrowings based on tenure and currency of the borrowings. Borrowings of 10 years and above will be under the category of long-term borrowings; those of 3-5 years would fall under the category of medium-term borrowings. The third category will include rupee-denominated borrowings with minimum average maturity of 3-5 years, said RBI. Only a small negative list of end-use restrictions will be applicable in case of long-term ECB and rupee-denominated ECB, said RBI.

While the broader intention appears to be to simplify the overseas borrowings, RBI has actually cut the cost at which short-term overseas borrowings can be raised, suggesting that it only wants higher quality issuers to go to the foreign market.

The all-in-cost ceiling for ECBs of 3-5 year maturity will be 300 basis points (bps) over the 6-month London Interbank Rate (LIBOR). Currently the ceiling is set at 350 bps over the six-month LIBOR.

One bps is one-hundredth of a percentage point.

For ECBs of maturity of more than 5 years, the cost of borrowing has been capped at 450 basis points over the six month LIBOR rate, compared to the current ceiling of six months Libor plus 500 basis points.

For borrowings of over 10 years, a maximum spread of 500 bps over the benchmark has been prescribed.

“A transitional period up to 31 March 2016 has been allowed to ECBs contracted till commencement of the revised framework and in respect of special schemes which are to end by 31 March 2016,” the central bank said in its notification.

After four consecutive years of heavy foreign currency borrowings, Indian companies have overseas borrowings this year owing to some increase in volatility in the currency, lower domestic interest rates and the limited need for long-term capital.

Until September this year, Indian companies had borrowed just under $20 billion from the overseas markets through loans and bonds. This is about a third lower than the amount borrowed in each of the last four years respectively. Overseas borrowings had hit a high in 2011 when Indian companies borrowed $36 billion in foreign currencies. Since then, every year, borrowings have stayed above the $30-billion mark, until this year.

The increase in overseas corporate borrowings has been seen as a source of vulnerability for emerging markets like India as it leaves companies susceptible to sudden swings in foreign exchange rates.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.

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