The deregulation of interest rates paid for external commercial borrowings (ECBs) may not bring much cheer to companies at this point in time
The Reserve Bank of India today said that it would lift the cost ceiling on ECBs till June 2009, when the policy will be reviewed. So far, a company could not pay an interest rate of more than 300 basis points over Libor on loans with tenures of three to five years and not more than 500 basis points over Libor for loans with tenures of more than five years.
Grasim Industries CFO DD Rathi said the availability of dollar funds was a major issue as international lenders had become cautious and were cutting down exposure to emerging markets. Cost, he said, was an important factor. If a company has to pay more for borrowing in foreign exchange, while interest rates in the domestic market are coming down, an AAA-rated company will work out the cost differential on a fully-hedged basis and then decide if it wants to borrow in foreign exchange or in rupees, Rathi said.
While Reliance Capital CEO Sam Ghosh did not see the interest rates abroad as a major hurdle to fund raising, he said, the lending volume was low due to the liquidity crunch and only large companies could borrow overseas.
However, bankers active in ECB syndication said the companies are already skirting the cost ceilings imposed by RBI. They said the additional borrowing costs abroad were accounted for by higher management fees paid to lenders or by opening an additional letter of credit with them for a higher fee. This deregulation, they said, could be termed as merely a market-friendly measure since it would help remove such hidden costs and make the costing of ECBs more transparent.
Apart from removing the cost restrictions, the ECB policy for certain sectors was also relaxed.
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