ECB sops

After setting labyrinthine rules for Indian firms looking to borrow overseas over the years, the Reserve Bank of India has been in the process of untangling them in recent months. Apart from ease of doing business considerations, the urge to simplify seems to have stemmed from the Rupee’s sharp slide against the dollar lately, which has made it imperative to stimulate inbound dollar flows. Last week, in one of its most sweeping relaxations yet, RBI broad-based the eligible list of borrowers taking the ECB route, reduced minimum maturity conditions and homogenised rules for borrowers from different sectors. The ability to tap into cheaper foreign currency loans to fund their immediate requirements may come as a material relief to the better-rated Indian companies, at a time when domestic interest rates remain quite sticky, thanks to a perennially hawkish monetary policy committee.

There are three material aspects to the RBI’s revised rules that represent significant changes. One, in place of putting out a restrictive list of sectors which can tap ECBs, the RBI has decided to open up this route to borrowers who are eligible to accept FDI. Given the brisk pace at which India has been opening up its sectors to FDI lately, this will substantially widen the list of companies that can access foreign loans beyond the traditional software, infrastructure and finance firms. Better-rated NBFCs, especially in microfinance, may find this a good window to tide over liquidity troubles. The all-in cost ceiling of 450 basis points above LIBOR though, may rule out ECBs for low investment grade or distressed firms. Two, the streamlining of the complex four-track structure for ECBs into just two for foreign currency and Rupee borrowings, simplifies life for borrowers. As opposed to multiple loan caps, the RBI has now proposed a uniform cap of $750 million for borrowers from different segments seeking to use the automatic route. Three, the minimum maturity for ECBs beyond $50 million has been pruned from five to three years, again allowing eligible companies to tap this route for their more immediate requirements, though end-use restrictions continue to bar companies from using ECBs for working capital needs or repaying Rupee loans.

Overall, a more laissez faire approach to overseas borrowings can certainly help India Inc lower its high cost of capital, at a time when domestic banks are unlikely to lower rates. But from a macro perspective, the RBI will need to remain vigilant on the excessive build-up of short-term debt, given that private commercial borrowings at over 37 per cent of the total, represent the Achilles heel of India’s external debt situation. The tendency of Indian companies to cut corners on foreign currency exposures by leaving them largely unhedged, renders the country and the currency particularly vulnerable to sudden global liquidity events or bouts of currency volatility. Therefore, the RBI should probably be balancing out these relaxations in its ECB rules with stricter hedging norms for firms seeking cheaper loans overseas.

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