The Hindu Business Line : Banks can borrow more from overseas branches

THE RBI TEAM: (From left) Dr Y.V. Reddy, Governor, RBI ; and his deputies Mr Rakesh Mohan; Ms Usha Thorat; and Ms Shyamala Gopinath, on their way to announcing the Credit Policy in Mumbai on Tuesday. - Shashi Ashiwal

Mumbai , Oct. 31

The Reserve Bank of India has enhanced the borrowing limits of banks from their overseas branches. They can now borrow funds up to a limit of 50 per cent of their tier I capital or $10 million (whichever is higher) from their overseas branches and correspondent banks. This includes borrowings for financing export credit, ECBs and overdrafts from their head office (HO) or nostro accounts. The earlier overall limit had been 25 per cent excluding borrowings for export credit.

Mr V.P. Shetty, Chairman, IDBI, said it was a good move particularly since project lending is on and investment and growth targets are poised to be higher. "This will provide IDBI access to Rs 4,000 crore in terms of funding," he said.

Mr O.P. Bhatt, Chiarman, State Bank of India, said that considering the high growth in credit and the need to provide more flexibility to banks, RBI has permitted higher borrowings from abroad. "Further, RBI's decision to further liberalise outflows on the capital account sends a positive signal to foreign investors and reinforces its commitment to carry forward the process of economic reforms in the country. In sum, financial sector reforms have been carried forward, giving a thrust to Indian banks which are already in the transformation mode with strategic alliances, massive technology upgradation, process overhaul, re-skilling and re-deployment of personnel receiving close attention of banks", he said.

Mr B. Sambamurthy, Chairman and Managing Director, Corporation Bank, said this would give banks one more source of raising funds as the limit would almost double. "A bank like ours has substantial unemployed capital, which can be used. Since corporates are raising ECBs, then why not banks? This is good as it gives more room to fund credit and increase liquidity," Mr Sambamurthy added.

According to treasury officials, it would diversify project funding. "With the foreign LIBOR coming down, the rupee strengthening and forward premia coming off, banks can now raise money at lower rates," said Mr K. Harihar, Head-Treasury, Development Credit Bank.

Some bankers, however, felt the move could perhaps contain the growth of export credit. Mr Vishwavir Ahuja, CEO, Bank of America, said, "The one negative in the Credit Policy is that borrowing for dollar-denominated export credit and overdrafts from HO/Nostro accounts are now collectively capped at 50 per cent of Tier I capital. Before, export credit was not restricted by any such limits and only borrowings from HO were confined to 25 per cent of Tier I capital."

Among the RBI's other moves, companies, eligible for accessing external commercial borrowings, can also avail themselves of an additional $250 million with an average maturity of more than 10 years under the approval route. This is over and above the existing limit of $500 million.

Corporates will have greater flexibility in managing their liquidity and interest costs and can now prepay up to $300 million of ECBs against the earlier limit of $200 million.

Short-term borrowings up to a period of one year or less, should however not exceed 20 per cent of Tier I capital, within the overall 50 per cent limit.

"Measures aimed at greater openness in capital account such as a higher limit for resident remittances overseas, increased portfolio investment limit in fixed income instruments, greater flexibility in borrowing overseas and the like are an indication of the growing comfort of the country on the external front," said Mr Neeraj Swaroop, CEO-India, Standard Chartered Bank.