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| Finmin to review ECB policy this week |
| Anindita Dey / Mumbai Jun 17, 2009, 00:46 IST |
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Proposes further easing of norms, but the Reserve Bank of India wants status quo.
The Ministry of Finance (Finmin), in consultation with the Reserve Bank of India (RBI), is set to review the external commercial borrowing (ECB) policy this week.
The ECB policy of the government details the modalities for Indian companies to borrow money in overseas markets.
According to official sources close to the development, while the ministry has suggested further easing of the policy, RBI prefers a status quo at present and gradual tightening later.
In fact, RBI is in favour of gradual rollback of various relaxations made in the ECB policy since last year for easing availability of foreign currency credit for India Inc. This is because most of the liberalisation such as higher limit for borrowing under the automatic route and relaxation of end use for ECB have
not been utilised so far, barring a few cases. Moreover, foreign exchange flows were expected to go up further, which would anyway warrant tightening of the limits later, said the sources.
Therefore, the central bank contends, further relaxation of the policy may not prove to be of much help for the companies, nor can it be sustainable from the monetary management point of view at this point in time.
The ministry has proposed to raise the limit of ECB per company per year, which is currently fixed at $500 million, the sources said. Besides, the ministry also wanted to raise the limit of borrowing by any company under the automatic route, they added.
Automatic route enables a company to access ECB without prior permission of RBI.
Further, the relaxation in all-in-cost ceiling in pricing of ECB is proposed to be brought under the automatic route. All-in-cost ceiling is the total price — including interest rate, transaction costs and taxes — fixed by the government for borrowing foreign currency denominated credit.
This is usually a spread over the international interest rate benchmark – London Interbank Offered Rate (Libor). Following the tightness in foreign credit and dollar crunch, the government has relaxed the pricing, thus enabling Indian companies to pay a higher price for foreign currency credit.
However, every company has to get the price approved by RBI before accessing the loan. Now, the ministry is considering a proposal to make borrowings at the relaxed pricing under the automatic route.
Moreover, there is no proposal to further enhance the internal limit set by the government to restrict foreign debt in the country, which is currently hovering around $35-40 billion.
There is also a proposal to relax end-use norms for ECBs, so that companies in the special economic zones (SEZs) could borrow foreign currency credit easily. At present, only those engaged in infrastructure in SEZs could access ECBs.
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