The Hindu : Curbs on ECBs: corporates feel the pinch

Online edition of India's National Newspaper
Saturday, Nov 22, 2003

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Curbs on ECBs: corporates feel the pinch

By Oommen A. Ninan

MUMBAI NOV. 21. The recent clampdown on external commercial borrowings (ECBs) has negative connotations for many corporates which have benefited by resorting to such low cost borrowings.

Last Thursday's unexpected announcement from the Finance Ministry was followed by the RBI which issued a circular repeaing the same provisions.

The new provisions affect the medium sized companies much more than the bigger ones .It is they who have made full use of the lower interest bearing foreign currency loans mopped up through the ECB routes.

In order to lower the interest rate burden or reduce high cost debt, corporates used to avail of the ECB route supported by a local bank guarantee as the total funding, fully hedged, (exchange rate plus interest rates) used to come to around 7 per cent. For example a currency swap, which includes the interest plus the exchange rate for five years is at around 4 per cent. Add to this "a spread'' of approximately two per cent over London Inter-Bank Offered Rate (LIBOR), the all inclusive cost of borrowing comes to 6 per cent. Even with a bank guarantee of 1.5 per cent the total 5-year ECB borrowing at zero risk worked out to 7.5 per cent, which is much lower than the existing PLR rates of Indian banks.

The exact reasons for the new restrictions are still not clear. Is it because the end use of the ECBs was not properly monitored by the bank which is issuing the guarantee. Others say that banks in India were losing valuable business because corporates were substituting their high cost loans with ECBs. Others say that the ECBs are debt-creating inflows while the Government seeks to encourage non-debt creating flows. Finally there is a case for Indian corporates to tap the local market and absorb the excess liquidity that exists today.

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