Limited takers likely for ECB booster to cheap housing

RBI has allowed companies to raise up to $1 bn but hedging of costs could make this unattractive for borrowers

Though the Reserve Bank of India has allowed real estate developers and housing finance companies to raise up to $1 billion (Rs 5,400 crore) via external commercial borrowing (ECB), hedging of costs could make this unattractive for borrowers.

"It looks very difficult to raise funds through this new window. Monitoring use of funds is going to be a challenge. Also, there is a question mark over preparation and ability for managing currency risks even through hedging," said S Srinivasaraghavan, head, treasury, Dhanlaxmi Bank.

Added Brotin Banerjee, managing director, Tata Housing: "In the short term, it might not be a good option, as you can also get such rates in non-convertible debentures. Why would one take currency risks and hedging risks if you can raise such loans domestically?"

ECB ARGUMENT

• Funds raised through external commercial borrowing (ECB) could be used either for developing low cost housing projects, or providing loans up to Rs 25 lakh to individuals for buying units with a price tag of Rs 30 lakh or less, RBI says
• Experts say in the short term, it might not be a good option, as companies can also get such rates in non-convertible debentures, and would prefer not take currency risks and hedging risks
• However, some developers say this is a move in the right direction, as even a three to four per cent advantage is large, if a company’s scale of operations are big

The funds raised through ECB could be used either for developing low cost housing projects or providing loans up to Rs 25 lakh to individuals for buying units with a price tag of Rs 30 lakh or less, RBI said in a circular on Monday.

"Even if you bring ECB, the cost of that will not be less than domestic debt because of hedging costs. Real estate does not have natural hedging, unlike IT (information technology), where you earn in dollars. But in sectors such as real estate, you need to buy dollars to repay loans. In that case, you are exposed to currency fluctuation risks," said Ambar Maheshwari, managing director, corporate finance, Jones Lang LaSalle, a global consultant.

According to Maheshwari, if one includes hedging costs, the effective rate comes to 10 to 11 per cent. ECB comes at Libor plus 500 to 600 basis points.

J Akilan, executive director, BBVA India, a European financial group, said lenders would first look at credit risks. Only on being convinced on this count would they get to the pricing aspect for such transactions. The challenge is in managing currency risk, as these projects might not have a natural hedge, sans foreign currency income.

"Though it will lead to more liquidity, there will be restriction on usage of funds and costs would not be exponentially cheaper. You cannot use that money to replace the existing loans, too," said Anuj Nangpal, director, investment advisory, DTZ International Property Advisors.

However, some developers say this is a move in the right direction. Added Ashish Puravankara, deputy managing director, Puravankara Projects: "At this point in time, when construction finance comes at 13.5 per cent, if your scale of operations is large, even a three to four per cent advantage is large. It is a move in the right direction." Puravankara is also developing budget housing projects through its Provident Housing arm.