India Inc faces tighter ECB guidelines

The Reserve Bank has been exploring the option of lowering all-in-cost ceiling as spreads soften

India Inc’s fund raising via external commercial borrowings (ECBs) is set to get tougher, as the Reserve Bank of India (RBI) has been exploring the option of reducing the all-in-cost ceiling.

At present, this ceiling, for an ECB of three- to five-year tenure, is six-month Libor plus 350 basis points. For those with tenure of more than five years, it is six-month Libor plus 500 basis points. RBI had enhanced the all-in-cost ceiling for ECBs in the three-five-year tenure by 50 basis points in November 2011. At that time, liquidity in the international market was tight.

According to an RBI official, the plan to review the ceiling was triggered by a fall in spreads. Bankers say the cost of borrowing by Indian companies through the ECB route has dropped 25-50 bps over the past six months.

The RBI move comes at a time when some companies, finding it difficult to raise funds within the present limit, have been demanding a relaxation in ECB norms. “There is an evidence of flight-to-quality syndrome, as only better-rated companies are getting funds and others are not, though global liquidity is not tight,” said a senior treasury executive of a foreign bank.

However, RBI officials say it is not because of the ceiling that some companies have not been able to raise funds, as spreads came down. It is due to their own ratings, the officials say.

According to CRISIL, downgrades have continued to outnumber upgrades in the second half of 2012-13 — 616 downgrades, against 379 upgrades. The downgrades were driven largely by a slowdown in demand and tight liquidity, resulting from stretched working capital cycles.

Indian companies have raised $5 million through ECB in March this year, compared with $3.7 million in the same period last year.

According to experts, RBI is also concerned about Indian firms’ unhedged exposure to foreign currency loans. In November last year, the central bank had observed that unhedged forex-exposure risks were not being evaluated rigorously and built into pricing of credit by banks, despite instructions. In the annual policy review, RBI asked banks to stipulate a limit on unhedged positions of corporate entities on the basis of banks’ board-approved policy.

Also, the central bank has proposed to increase the risk weight and provisioning requirement on banks’ exposure to the corporate sector on account of unhedged forex-exposure positions.

There are apprehensions on whether tightening of ECB norms will be prudent at a time the country is running a high current account deficit (CAD), while the other view is that the deficit is expected to come down this financial year.

CAD soared to a record high of 6.7 per cent of gross domestic product in the quarter ended December 2012.

But Finance Minister P Chidambaram last month said CAD was likely to come down to “more tolerable and acceptable” levels in 2012-13, once the fourth-quarter numbers were out. A CAD of 2.5 per cent is seen as within RBI’s comfort level.

TRIGGER FOR THE MOVE

* In Nov 2011, RBI increased the all-in-cost ceiling for three- to five-year tenure ECB to six-month Libor plus 350 basis points
* Spreads have fallen 25-50 bps in the past six months, prompting RBI to consider a cut in the ceiling
* Concern over India Inc’s unhedged exposure of foreign currency loans has also prompted the RBI move
* Rating downgrades have made it difficult for companies to raise funds abroad
* Expectation of CAD narrowing has been giving comfort to RBI