Foreign borrowing norms relaxed

RBI gives a leg-up to rupee bonds

  The Reserve Bank of India (RBI) on Monday approved a set of more liberal external commercial borrowing norms (ECB), allowing Indian companies to raise rupee resources from overseas lenders, without incurring currency risks.

The new norms will be effective April 1 next year.

Such rupee-denominated bonds are being issued in large numbers. They are a hit with Japanese retail investors.

More liberal norms

In focus
RBI allows more liberal norms for external commercial borrowing
On ground
Effective from 1 April
Hit abroad
Rupee-denominated bonds, which are already being issued in large numbers, are a huge hit with Japanese retail investors
Effect on currency
As more such bonds are issued, rupee will become more international

Once Indian companies start raising rupee resources from abroad, more such bonds will be issued and would help make the domestic currency more international.

For ECB in foreign currency, the central bank raised the limit for small-value bonds, with a minimum average maturity of three years, to $50 million from the existing $20 million. For ECB of more than $50 million, the minimum maturity period should be five years, it said. The all-in cost for such ECB has been reduced 50 basis points from what was allowed earlier.

For long-term ECB though, the all-in cost is 50 basis points higher. For rupee-denominated ECB, the rate will be commensurate with the prevailing market conditions.

Apart from usual lenders like banks, such rupee resources can now be borrowed from sovereign wealth funds, pension funds and insurance companies, according to the final guidelines. The liberal approach, with fewer restrictions on end uses and higher all-in cost ceiling will help for "long-term foreign currency borrowings as the extended term makes repayments more sustainable and minimises roll-over risks for the borrower," RBI said in a statement.

Such an ECB policy means attracting foreign funds "will continue to be a major tool to calibrate the policy towards capital account management in response to the evolving macro-economic situation," the central bank said, adding the guidelines will be reviewed after one year, based on the experience and evolving macro-economic situation.

For ECB with a minimum three- to five-year average maturity, the all-in cost ceiling is 300 basis points over the six-month London Interbank Offer Rate (Libor), or applicable bench mark for the respective currency.

The ECB with an average maturity of over five years will carry a ceiling of 450 bps over the six-month Libor.

The penal interest for default or breach of covenants is capped at two per cent over and above the contracted rate of interest.