Financial institutions have decided against offering guarantees for foreign currency loans raised by small and medium corporates after the finance ministry rejected their plea to close down the Reserve Bank of India's $3 million automatic clearances window for external commercial borrowings (ECBs).
A decision to this effect was taken recently by the heads of financial institutions, an FI source revealed. Small and medium-cap corporates will now find it difficult to tap foreign lenders directly in a replication of the trend in 1996-97. This is so because most of these corporates are unknown to foreign lenders, who are generally wary of offering non-recourse loans to unknown borrowers.
After the finance ministry threw open the RBI window, most first-time borrowers seeking to raise foreign currency commercial loans of up to $3 million have received clearances without any questions asked as long as they adhered to the guidelines for raising ECBs.
Over 300 new borrowers directly tapped foreign lenders during the year, resulting in a drop in the offtake of foreign currency credit from term lending institutions.
The ministry's rationale for freeing clearance of foreign currency commercial loan applications up to $3 million is that this would allow Indian corporates to get familiar with the international markets, which in turn would prepare them for full convertibility.
The move has led to a substantial drop in the institutions' share of the overall ECBs in 1996-97. Against approvals to raise foreign currency loans amounting to $1.84 billion in 1995-96, the institutions together held approvals worth only $1.07 billion till December 31, 1996.
This was marked in a year when the government provided preferential access to term lending institutions, enabling them to borrow abroad to provide project finance to small corporates who may not be able to directly access foreign lenders.
Under the preferential access dispensation, term lending institutions were allowed for the first time in 1996-97 to raise dollar loans to fund the rupee cost of projects.
This was at a time when the economy was passing through a major credit crunch and it was the intention of the incoming government to facilitate availability of credit to the corporate sector.
However, availability of credit with banks and financial institutions did not improve credit offtake as interest rates continued to be high and the corporate sector preferred to directly tap foreign lenders.
The situation prompted nationalised banks and institutions to lobby the government to close down the Reserve Bank automatic clearance window for external commercial borrowings. However, their plea has been rejected in the new ECB policy for 1997-98.
Sources in the finance ministry said the way out for institutions was to become more competitive rather than force a situation that would create demand for their high-cost funds.