The government on Friday allowed players in power, aviation, roads and low-cost housing projects to go for external commercial borrowings (ECBs), as domestic borrowings turn costly under the high interest rate regime and certain sectors find it difficult to raise funds.
In Budget 2012-13, finance minister Pranab Mukherjee also slashed withholding tax on interest payments on ECBs by select infrastructure companies as the core sectors crawl to grow in line with India’s needs.
However, analysts say the thing to watch will be how many companies are able to raise cash via ECBs as lenders will demand that the companies’ ratings be on a par with at least the BBB sovereign grading for India.
The Budget has also allowed airline companies to use ECBs for one year, subject to a ceiling of $1 billion. While companies such as Kingfisher may get relief from this move, as it finds it difficult to get fresh loans from Indian banks, the going may not be easy for many, as foreign lenders will be concerned about the safety of their loans. Recently, the country’s largest lender, SBI, had ruled out giving fresh loans to cash-strapped Kingfisher, due to concerns over non-performing assets.
Amber Dubey, director of aviation at KPMG, said, “Preliminary estimates are that this (ECB) may save 150-300 basis points (of interest rates) for working capital loans for airlines. The key concerns, however, will be banks’ reluctance to lend to the sector and hedging costs."
In power, only existing projects will be allowed to go for overseas borrowings to swap their high-cost rupee debt. The power sector, already facing tough times due to issues relating to fuel availability and rates, would get a major relief.
For the upkeep of national highways, the finance minister allowed ECBs for capital expenditure on the maintenance and operations of toll systems for roads and highways.
The finance minister also allowed foreign borrowings for low-cost affordable housing projects. Analysts say National Housing Bank is likely to use ECBs to collect cash and distribute loans to players who cannot access the route.
The Budget cut withholding tax on interest payments on ECBs raised by players in seven sectors from 20 per cent to five per cent for three years. The sectors are power, airlines, roads and bridges, ports and shipyards, affordable housing, fertiliser and dams.
According to the finance ministry's latest report on external debt, the share of ECBs in India's external debt has increased substantially over the past few years. Between end-March 2006 and end-March 2011, these borrowings registered a compound annual growth rate of 27.4 per cent, with the share in external debt climbing up to 30.3 per cent at the end of September 2011.
In the report, the ministry had also raised concerns over the increase in ECBs, given that the depreciation of the rupee leads to a higher debt service burden in rupee terms that could impact the profitability of corporate borrowers. India’s short-term debt rose to $71.5 billion as on September 2011, a jump of 10.1 per cent from March 31, 2011.