 "Meet tomorrow on ECB rules")
The Union finance ministry is expected to hold a meeting with non-banking financial companies and other firms on Tuesday, on a possible easing in external commercial borrowing (ECB) norms. However, it might ask these companies to opt for medium and long-term debt, so that redemption pressure does not come too soon, at a time when India is facing uncertainty over capital flows, officials said. ECB, and some minor external debt, of up to a year of residual maturity stood at $21 billion as at the end of 2012-13, comprising just 14.5 per cent of the total of borrowings due for payment from this route, of $144 bn.
This proportion had been a little less than 16.5 per cent at the end of each of the previous two financial years. ECB of up to a year of residual maturity was around $13 bn or 13.5 per cent of the $95 bn of borrowing to be repaid through this route at the end of 2009-10. At the peak of the global financial crisis, at the end of 2008-09, the situation was bit more relaxed, with such ECB just 10.8 per cent of total ECB owed by India at $85 bn. (FUND RELIEF)
This proportion had been a little less than 16.5 per cent at the end of each of the previous two financial years. ECB of up to a year of residual maturity was around $13 bn or 13.5 per cent of the $95 bn of borrowing to be repaid through this route at the end of 2009-10. At the peak of the global financial crisis, at the end of 2008-09, the situation was bit more relaxed, with such ECB just 10.8 per cent of total ECB owed by India at $85 bn. (FUND RELIEF)
Why longer term
Given this, the ministry is insistent on medium or long-term borrowing through this route due to the situation regarding total external debt, say analysts. Total external debt with up to a year of remaining maturity was $172 bn at the end of 2012-13. This comprised 44.2 per cent of total external debt and 59 per cent of foreign exchange (forex) reserves. This means if forex reserves remain at the 2012-13 level, more than half of it will go to finance the external debt due for redemption by March 31, 2014. However, forex reserves invariably do not remain static.
The pressure on short-term external debt mainly comes from short-term government papers and non-resident Indian (NRI) deposits, which together constitute 84 per cent of these liabilities that will mature by March 31, 2014. Not much is raised for the short-term period of up to a year in ECB in general. The $21 bn of ECB with residual maturity of one year as on March 31, 2013, was because of accumulated borrowing.
According to the latest figures, for June, of the 81 items of ECB raised, only one was for nine months; the rest were all for over one year of maturity. The trend was more or less the same in earlier months. The ministry might insist that companies go for five-seven year terms in ECB. In June, 65 of the total of 81 ECBs raised were five years or more in tenure. The majority of ECB raised was for at least this much in earlier months, too. In June, the longest tenure was 17 years for $250 mn of ECB, raised by Sabic Research and Technology for import of capital goods. ECB is the biggest chunk of the external debt pie. These comprised 31 per cent of the total external debt of $390 bn at the end of 2012-13. The figure stood at 30.3 per cent at the end of 2011-12 and 28.9 per cent at the end of 2010-11. The debt raised by companies through ECB comprised just 12.2 per cent at the end of 1990-91, when India faced a balance of payments crisis, since at that time there were many restrictions on this route. Then, borrowing from multilateral institutions comprised the largest category, at 24.9 per cent of external debt, as India resorted to a 551.93 Special Drawing Rights loan from the International Monetary Fund in January 18, 1991.
Amounts & use
The ministry might ease the norms for ECB because capital flows are drying in the foreign market, while demand is not growing in India, leading to a fall in money raised abroad to $32 bn in 2012-13 against $34.6 bn the previous financial year. Money raised through the ECB route fell 31.4 per cent at $5.6 bn in the first quarter of the current financial year against $8.1 bn in the previous Q1.
Most of the ECB raised in India is for import of capital goods, modernisation and new projects. For example, $1.2 bn was raised for these three purposes, of the total $1.9 bn, for June. Of this, $885 million was borrowed for import of capital goods, $158.6 mn for new projects and $153 mn for modernisation. The largest chunk of ECB, of $487 mn in June, was for import of capital goods by Reliance Industries. Last month, the Reserve Bank of India had allowed Indian companies which are consistent foreign exchange earners, engaged in manufacturing, infrastructure or the hotel sector and have a foreign joint venture or wholly owned subsidiary to avail of ECB under the approval route for repayment of rupee loans from domestic banks for investment abroad.
The relaxation was aimed at helping Indian companies replace domestic loan dues with cheaper foreign borrowing. In the current ECB guidelines, companies can avail of these for repayment of rupee loans from the domestic banking system for capital expenditure under the approval route. As much as $327 mn was raised for refinancing the old loans under the approval route in June.
If the automatic route is combined, $470 mn was borrowed for refinancing the old debt. This represented almost 25 per cent of total debt raised through ECB. Most of the ECB raised comes via the automatic route. Of 81 ECB items raised for June, 71 were through this route and only 10 via the approval route. At Tuesday’s meeting, the ministry might further ease ECB norms, particularly for infrastructure companies, though only after assessing the requirements of these firms. The ministry will talk to foreign lenders of these firms to ensure the companies’ claims are real.
Under the ECB route, borrowers can raise dollar-denominated loans directly from international banks, international capital markets, multilateral financial institutions such as the IFC or ADB, export credit agencies, suppliers of equipments, foreign collaborators and foreign equity holders.