New Delhi: Concerns that difficulty in accessing credit may hurt investments and growth, and relief from the depreciating rupee have made India ease overseas borrowing rules for companies that were originially tightened last August.
The new rules that deal with the raising of foreign debt to fund domestic expenditure will allow infrastructure companies to borrow five times more than the present ceiling of $20 million (Rs85.6 crore), providing them access to an alternative route of funding at a time when tight domestic liquidity conditions have begun to affect new investments.
EASIER CREDIT (Graphic)
For non-infrastructure companies, the ceiling on external commercial borrowings (ECBs) to fund rupee exenditure was raised from $20 million to $50 million.
The country also enhanced investment limits for foreign investors in Indian government debt from $3.2 billion to $5 billion and doubled the limit on ownership of government bonds to $3 billion in an attempt to strengthen the debt market.
“This is a very good move for the corporate bond market,” said Anil Ladha, executive vice-president, ICICI Securities Primary Dealership Ltd.
The government also raised the limit on the cost of ECBs, thereby making it possible for more companies to tap international markets to fund rupee spending.
The revised rules, along with a falling London inter-bank offer rate (Libor), which determines the base cost for such borrowings, could lower the cost of overseas borrowing of infrastructure companies by up to 250 basis points (a basis point is one hundredth of a percentage point) compared with the cost of domestic borrowings, debt market investors said.
ECBs have risen significantly in the last couple of years as companies have used favourable conditions in overseas markets to fund local investments. The net ECB flow between April and September 2007 was $10.5 billion compared with $5.7 billion in the corresponding period of the previous year. ECBs made up 28.3% of India’s external debt on 31 December 2007, the single largest component.
However, concerns that foreign inflows were pushing up the rupee and complicating monetary policy management forced the government to tighten ECB norms last August.
The changes announced on Thursday will come into effect once they are notified by the country’s central bank, the Reserve Bank of India (RBI), and come in the wake of a predicted slowdown in economic growth in the current financial year to 8-8.5%, and an 8% fall in the value of the rupee against the dollar thus far this year. The rupee closed at Rs42.785 a dollar on Thursday.
India’s economy grew by 8.7% and 9.6%, respectively, in the past two years and the first number is likely to be revised upwards as the agricultural sector has done better than expected in 2007-08.
Following the new rules, a special purpose vehicle created for an infrastructure project can access ECBs for a period of five years and more at an interest rate of 9.5-10%, up to 250 basis points lower than the rate typically charged by Indian banks today for a loan with similar features, Ladha said. The revised ECB costs include the expense incurred to hedge foreign currency, he added.
To keep investments of Indian companies going, the key changes in the revised ECB guidelines have been to increase borrowing limits and permit a larger interest rate spread over Libor.
The interest rates on ECBs are linked to a spread over the Libor.
The ECB market has seen two seemingly contradictory trends over the last year, which while bringing down the actual cost of borrowing have also shut out many Indian companies. The Libor has fallen in the last few months on the heels of a soft interest rate policy followed by the US Federal Reserve.
The cost of ECBs, including currency hedging costs, with a maturity of three-five years has fallen by almost a percentage point over a year to about 7.5% today, Ladha said.
Simultaneously, the spread over the Libor for Indian firms has increased from about 70 basis points to about 100-200 basis points as the general risk perception in international markets has worsened. The increased spread shut out some Indian firms as the government fixes a ceiling for the spread above Libor at which Indian firms can access ECBs.
The revised ECB rules have increased the spread by 50 basis points above Libor to 200 basis points for loans with a maturity between three years and five years. The maximum spread on ECBs with a maturity above five years has been increased by 100 basis points to 350 basis points.