Despite tightening of norms, cap on interest rates

N.S.Vageesh

Chennai, Dec 14 There has been a 63 per cent increase in external commercial borrowings made by Indian companies during the first seven months of this fiscal. About 384 companies have borrowed about $19 billion during the seven months ended October 2007, according to information released by the Reserve Bank of India.

During the whole of the last fiscal, about 921 companies borrowed money worth about $25 billion abroad.

This year the heavy borrowing comes despite steps taken by the Reserve Bank of India to limit access to external commercial borrowings to certain sectors and also tighten it generally by imposing a cap on the interest rates that can be paid on such borrowings.

Of the $19 billion raised so far this fiscal, about $11.64 billion was raised through the automatic route while $7.5 billion was raised through the approval route. Under the automatic route, borrowers only need to report their plans after raising the money, while under the approval route, prior sanction of the RBI is required.

About four months ago, the RBI had said that external borrowings of over $20 billion (about Rs 80 crore) for the purpose of rupee expenditure would require its approval. Subsequently, there were reports that the RBI was keeping a number of applications for borrowing pending in view of the unprecedented inflows of forex during this period.

Interestingly, the rise in external borrowing comes when there is a perceived tightening in interest rates in international markets following the unravelling of the sub-prime crisis troubling a number of American and European banks.

Looking at the numbers, there has been a noticeable drop in the number of companies who have accessed the ECB route. From a high of about 109 companies that tapped the ECB route in March 2007, the number dropped to just about 30 companies in the latest month of October 2007 for which figures are available. Yet, the amounts borrowed by the few have been higher.

(This article was published in the Business Line print edition dated December 15, 2007)
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