The Reserve Bank of India’s revamped norms for external commercial borrowings (ECB) benefit global lenders rather than domestic borrowers, analysts and bankers said.
The new rules were announced by the RBI in November 2015. Sectors such as housing finance and infrastructure have been left high and dry, with ECB applications pending for over nine months and in some cases the government has urged the central bank to review its stance on restricting medium-term borrowings for infrastructure projects.
“I am rather surprised how it has happened, but the latest ECB guidelines do not talk about housing. This (financial) year, almost nine months have gone and all the housing finance companies are waiting for ECB approvals. If my information is correct, there are around 16 applications which are pending,” Mr. Sanjaya Gupta, Managing Director of PNB Housing Finance, told The Hindu.
“I think we have about $2 billion worth of ECBs permissions or applications pending,” he added.
The relaxed norms in the new framework were more complex than the previous set of rules, analysts said.
“In a nutshell, it is two steps forward one step back. They have made it a bit more complicated. Earlier, it was a straightforward regime, now they have introduced three tracks of ECBs (according to tenor of the loan),” said Shishir Mehta, Partner, Banking and Finance at law firm Khaitan and Company, adding that the intent was good and some changes were in the right direction. The revised framework’s three tracks include medium-term foreign currency denominated ECBs with a maturity period of three to five years (Track I), long-term foreign currency denominated borrowings with a maturity period of ten years (Track II), and rupee denominated borrowings of a maturity period of three to five years (Track III).
The road transport ministry had written to the RBI governor last month that limiting ECBs in the infrastructure sector in Track II and III could limit financing from international lenders who may not be comfortable with providing long-term borrowings to Indian companies in the infrastructure space.
Under the Track I norms, shipping and airline companies can tap ECBs for importing vessels and aircrafts, respectively, and for payment of towards capital goods already shipped or imported but not paid for.
But ECBs are not permitted for working capital in the civil aviation sector, for repayment of rupee loans or fresh capital expenditure by companies with consistent foreign exchange earnings under the $10 billion scheme, or in the low cost affordable housing segment under the Revised Framework, according to a note by international law firm Majmudar and Partners.
“This is the first time there is a rupee denominated track. A lot of things are not quite clear about this as yet, like whether it will be accepted by the market. There are other issues with hedging that will also have to be sorted out,” Mr Mehta said.
Akil Hirani, managing partner at Majmudar & Partners said that the new ECB framework eases the process of raising global financing for infrastructure firms, real estate investment trusts and core investment companies.
“However, true liberalisation will only be achieved if there is a very small negative list of eligible borrowers, and the restrictions on permitted uses are further whittled down,” Mr Hirani said, adding that the new norms were also unclear about the treatment of foreign currency convertible bonds (FCCB) and foreign currency exchangeable bonds (FCEB).
“FCCB is a permitted form of external commercial borrowing. FCEB can only be done through the approval route. FCEB is more akin to an equity instrument while FCCB is a form of debt, and so that’s why the RBI wants greater control over the former,” said Mr Mehta.
The new rules have liberalised the lending side, while there has been no real change in the borrower base.
“The RBI has opened up the lender base abroad. We can now get access to funds from pension companies, insurance companies, wealth funds, etc, and the Indian market can tap that,” Mr Mehta said.
The silver lining according to Hirani, is that the RBI has said this ECB framework will be modified after an year, around November 2016, based on the ECB activity and the prevalent macroeconomic situation.
“This is good as it shows the RBI’s commitment to tweak policy more frequently to ensure that the purpose of the policy is fulfilled,” he said.
