No upturn soon in ECBs despite new rules

Earlier this week, the Reserve Bank of India (RBI) revised the rules for external commercial borrowing, to make it easier for units in the infrastructure sector to raise funds abroad. However, it will be a while before a rise in such borrowing as companies estimate the effects of currency volatility and the pricing formula for rupee loans.

Bankers and analysts say the policy change is conductive in the long run for companies to use the ECB route. They will, however, remain cautious in the near term, due to swings in currency values and study the implications of the new regime for pricing loans. the marginal cost of funds-based lending rate.

Use of the ECB route had moderated in the past three years, for a variety of factors. Indian companies raised $32 billion through ECBs in 2012-13. The growth was flat in 2013-14 and fell to $28.4 bn in 2014-15. The amount raised was $21.5 bn in the first 10 months of FY16.

Aditi Nayar, senior economist at ratings agency ICRA, said use of ECB was subdued as economic activity itself was in low gear. This had reduced the working capital requirement. Also, the fall in commodity prices had an effect on demand (for money).

The economy has seen a gradual turnaround but is yet to translate into a pick-up in investment.

Joiel Akilan, executive director & chief representative  — India at BBVA, the Europe-based financial services group, said global uncertainties, less of new large projects, deteriorating credit risk and a depreciating rupee had contributed to less demand for such loans.

The aim of revising the norms was to make it easy to use ECB for enhanced borrowing, given the cost differential between domestic markets and global spaces. However, this has to be done while adhering to prudential risk practices.

Madan Sabnavis, chief economist at CARE Ratings, said RBI’s move will make it easier for infra companies to raise funds and to refinance costlier debt, as loans with shorter maturity are cheaper than long-term borrowing.