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ECB rate cap gone, but impact to take a while

BS Reporters  |  Mumbai 

The deregulation of interest rates paid for external commercial borrowings (ECBs) may not bring much cheer to companies at this point in time

The Reserve Bank of India today said that it would lift the cost ceiling on ECBs till June 2009, when the policy will be reviewed. So far, a company could not pay an interest rate of more than 300 basis points over Libor on loans with tenures of three to five years and not more than 500 basis points over Libor for loans with tenures of more than five years.

Grasim Industries CFO DD Rathi said the availability of dollar funds was a major issue as international lenders had become cautious and were cutting down exposure to emerging markets. Cost, he said, was an important factor. If a company has to pay more for borrowing in foreign exchange, while interest rates in the domestic market are coming down, an AAA-rated company will work out the cost differential on a fully-hedged basis and then decide if it wants to borrow in foreign exchange or in rupees, Rathi said.

While Reliance Capital CEO Sam Ghosh did not see the interest rates abroad as a major hurdle to fund raising, he said, the lending volume was low due to the liquidity crunch and only large companies could borrow overseas.

However, bankers active in ECB syndication said the companies are already skirting the cost ceilings imposed by RBI. They said the additional borrowing costs abroad were accounted for by higher management fees paid to lenders or by opening an additional letter of credit with them for a higher fee. This deregulation, they said, could be termed as merely a market-friendly measure since it would help remove such hidden costs and make the costing of ECBs more transparent.

Apart from removing the cost restrictions, the ECB policy for certain sectors was also relaxed.

In a notification RBI said that hotels, hospitals and software firms, which could raise up to $100 million a year through ECBs for import of capital goods, can now can now access the window for foreign currency or rupee capital expenditure. The only end-use restriction imposed is on using the funds for acquiring land.

Non-banking companies (NBFCs) exclusively involved in infrastructure financing can avail of ECBs from multilateral or regional financial institutions and government-owned development financial institutions for on-lending. RBI will, however, factor in the aggregate commitment of these lenders directly to infrastructure projects in India. Also, the direct lending portfolio of the foreign lenders vis-à-vis their ECB lending to NBFCs, should not be less than 3:1.

In case of integrated township, the minimum area to be developed should be 100 acres subject to local rules. In the absence of local rules and bye-laws at least 2,000 dwelling units for a population of 10,000 needs to be built. Integrated township includes housing, commercial premises, hotels, resorts and city and regional level urban infrastructure.

First Published: Sat, January 03 2009. 00:00 IST