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Indian banks should not be allowed to extend ECBs to domestic corporate houses out of their overseas subsidiaries or branches, a government-appointed panel has said.
A recommendation to this effect was made by the Sahoo Committee in its report on foreign currency borrowings made public on Friday.
This norm should also apply for guarantees, which means that Indian banks based abroad should not be allowed to extend guarantees for ECBs, the panel has suggested.
The Sahoo panel has said that external commercial borrowing (ECB) may be raised from any lender who is from a financial action task force (FATF) compliant jurisdiction and who has no Indian interests. This would essentially shut the window for Indian banks to extend ECBs to domestic corporates out of the overseas branches/ subsidiaries of these banks.
This is a good suggestion as some domestic corporate houses tended to use the ECBs raised from the overseas branches of Indian banks to “evergreen” their existing rupee loans from the same banks, sources in the banking industry said.
Evergreening refers to the practice of companies taking new loans to pay off an existing loan.
The Sahoo panel has recommended that restrictions on borrowers, lenders, end-uses, amount, maturity, all-in-cost ceiling must be removed.
These restrictions have outlived their utility and must be removed as they do not address now the identified market failures associated with ECB — that is systemic risk arising from currency exposure and global risk tolerance, the Panel has said.
Also, Indian firms should be allowed to access ECBs for any end use. The negative list under the FDI policy should be the negative list for ECB, the Sahoo Panel has said.
One reason why Sahoo Panel has suggested that banks should not be allowed to extend ECBs from their overseas units is to avoid foreign exchange risk for both lender and borrower.
The panel does not want both lender (Indian bank based abroad) and the borrower (Indian company) to face forex risk on the same loan transaction, sources said.
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