Assocham for flexibility in borrowing via bonds, MTNs

Move could help the lenders garner funds with a minimum tenure of 3 years from good quality institutional investors

The Reserve Bank must allow flexibility in borrowing through bonds and Medium Term Notes (MTN) for Indian banks with strong balance sheets, industry body Assocham said today.

The move could help the lenders garner funds with a minimum tenure of three years from good quality institutional investors.

"This borrowing should be over-and-above 100% of Tier-I Capital and be considered only for banks with acceptable international risk ratings with minimum tenure of three years," Assocham Secretary General D S Rawat said.

Since the current regulations do not allow entities other than correspondent banks to lend to an Indian bank, instruments such as Medium Term Notes (MTN) subscribed by diversified set of financial investors are not allowed to be issued by Indian Banks that do not have foreign subsidiaries, he added.

Currently, Indian banks without foreign subsidiaries are subject to withholding tax on the interest payment to offshore lenders, which is a function of the country of domicile of the lender and the treaty between India and the concerned country.

"The withholding tax can be as high as 20%, thus impacting the net landed cost in Rupee terms. The external commercial borrowings, however, are subject to uniform withholding tax rate of 5%," Rawat said.

This gap may be bridged thereby making the foreign borrowings more cost-competitive, he added.

The industry chamber has also suggested that domestic procurement of capital goods used for manufacturing export merchandise should be allowed funding through FCY (foreign currency) funds at lower cost of borrowings for exporters, which will help reduce the pressure on the Rupee.

It has further recommended that banks be allowed to include PCFC (Pre-shipment Credit in Foreign Currency) under their PSL (Priority Sector Lending) on the lines of some foreign banks in India.

Moreover, the RBI in consultation with the government could also allow dematerialisation of bills of exchange issued by large overseas importers against goods received from SMEs, Assocham said.