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The Reserve Bank of India plans to revise all-in-cost ceiling for new Foreign Currency (FCY) External Commercial Borrowings (ECB)/Trade Credit (TC) for India Inc from 450 basis points (bps) to 500 bps and from 250 bps to 300 bps, respectively, over the alternative reference rates (ARRs).
In view of the imminent discontinuance of LIBOR (London Interbank Offered Rate), the RBI said any widely accepted interbank rate or ARR applicable to the currency of borrowing may be used as a benchmark, post discontinuation.
The proposed all-in-cost ceiling for new FCY ECB/TC takes into account differences in the credit risk and term premia between LIBOR and the ARRs.
Benchmark rate
Currently, the benchmark rate for FCY ECB/TC is specified as 6-months LIBOR rate or any other 6-month interbank interest rate applicable to the currency of borrowing.
ECBs are commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (for example floating rate notes and fixed rate bonds) availed from the non-resident lenders with a minimum average maturity of three years.
TCs refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit.
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