The committee of secretaries set up by the prime minister to recommend measures to help Indian industry through the global financial crisis is likely to recommend changes in external commercial borrowing (ECB) norms.
Permitting realty firms to tap ECBs, relaxing borrowing norms for non-banking finance companies (NBFCs), increasing the ECB limit 50 per cent to $750 million under the automatic route (that is, without central bank permission) and raising the price ceiling at which overseas loans can be raised are among proposals the committee is considering.
These relaxations come against complaints from realty and NBFC firms about dwindling domestic fund sources and rising borrowing costs. At present, real estate firms are not allowed to tap the ECB route and NBFCs are allowed to borrow within guidelines specified by the Reserve Bank of India (RBI).
"ECB norms for the infrastructure sector may be relaxed. However, the relaxation may be extended to other sectors as well," confirmed Gajendra Haldea, advisor to Deputy Chairman of the Planning Commission. “There is a genuine merit in the point for making available enough funds for housing,” he said on the sidelines of a conference organised by CII on infrastructure.
For realty, the committee may relax norms only for integrated township projects, said a top finance ministry official. Realty firms were demanding infrastructure status for real estate apart from using ECB proceeds without restriction.
In October 2008, the government has permitted companies to use the ECB route up to $500 million per financial year for rupee expenditure under the automatic route (see table). In addition, the India Infrastructure Finance Company Ltd (IIFCL) was allowed to raise Rs 10,000 crore of tax-free bonds and function as a refinancer for the sector.
The government is also expected to relax the pricing allowed for borrowing foreign exchange loans by raising the spread or premium charged over the international interest rate benchmark, the London Interbank offered rate (Libor).
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At present, a company cannot pay more than 300 basis point over Libor on loans for three to five years and not more than 500 basis points over Libor for loans above five years.
However, the dollar crunch and risk aversion to emerging markets have made dollar loans costlier for Indian companies.
For NBFCs, the committee is likely to recommend relaxing ECB norms in terms of ceiling on interest and tenure of loans. At present, deposit-taking NBFCs are allowed to borrow up to 50 per cent of their net-owned funds for tenures of three years, but with the rate ceiling of Libor plus 200 bps.
"Any kind of relaxation will definitely create an additional avenue of fund raising for infrastructure,” said Sanjay Sethi, executive director and head of infrastructure of Kotak Investment Bank. NBFCs are major financiers of construction equipment used in infrastructure projects.