FinMin may tweak ECB norms to tap funds to finance CAD

As dollars turn scarce, hammering the rupee, the finance ministry might ease norms for raising funds through an external commercial borrowing (ECB) window. Senior finance ministry officials will shortly hold deliberations with non-banking financial companies and other firms to tweak ECB rules for companies, particularly infrastructure firms. A section of analysts said net dollars inflow might not be enough to finance the current account deficit (CAD) in 2013-14.

The government will assess the requirements of these firms for ECB before taking a call. "Companies often claim too much, but in reality, are not able to raise the claimed amount," a finance ministry official told Business Standard.

The ministry will talk to foreign lenders of these firms to ensure that the companies' claims are real.

It will also ask these firms to raise loans with a repayment period of at least seven years, so that the burden of early maturity does not fall at a time when dollars are badly needed in the economy. The rupee touched a record low of 61.10 a dollar on Friday, compared to 60.40 the previous day, despite measures to stem the fall by the Reserve Bank of India .

The ministry's move will allow Indian companies access to cheaper funds abroad and bring more dollars into the country when financing of CAD has become a worry with capital flows also dwindling.

Under the ECB route, borrowers can raise dollar-denominated loans directly from international banks, international capital markets, multilateral financial institutions such as International Finance Corporation and Asian Development Bank, export credit agencies, suppliers of equipment, foreign collaborators and foreign equity holders.

An ECB window of $1 billion was made available to low-cost affordable housing in December 2012. "I think it is a good move and should be done the soonest. What I would look at is a major reform in ECB and not incremental reforms. The government would need to define the negative list and let every other sector be permitted to borrow," said Siddharth Shankar, advisor to KASSA, a financial services firm.

Some companies had raised concerns that they were unable to tap the route as stringent conditions prohibited some international lenders from lending to them. At present, ECB can be taken against imported equipment. NBFCs have requested the government to allow it against any equipment.

Currently, ECB can be raised for investment such as import of capital goods, new projects, and modernisation or expansion of existing production units. The maximum amount of ECB which can be raised by a company is $750 million in a financial year. Those in the services sector such as hotels, hospitals and software sector are allowed to avail of ECB up to $200 million.

ECB can be raised for industrial sector, infrastructure sector and some services. Infrastructure sector includes power, telecommunication, railways, roads, ports, industrial parks, urban infrastructure, mining, exploration and refining and cold storage. Around $121 billion worth of ECB were raised in 2012-13, representing over 15 per cent higher sum than around $105 billion borrowed in the previous year.

It accounted for 31 per cent of external debt raised by India in FY13 against 30.3 per cent in FY12. However, companies have raised just $3.6 billion in the first two months of the current financial year (FY14). This was 41 per cent less than the $6.1 billion mopped up in the corresponding period of the last financial year.