A relaxation in the external commercial borrowing (ECB) norms by the Reserve Bank of India (RBI) is unlikely to bring any fresh money into the country as institutional investors and global financial institutions are reluctant to take exposure to emerging markets. It would be difficult for India Inc to borrow from the overseas market, feel bankers and finance managers of the country’s leading corporate houses.
When prevailing interest rates for banks are between 5.6 per cent and 12 per cent above the London Inter-Bank Offered Rate (Libor), it would be difficult for the corporate sector to raise seven-year loans at 5 per cent over Libor, said a chief executive officer of a large corporate house.
It is difficult to raise funds overseas as investors are reluctant to take exposure to debt or equity at this point of time, said Y M Deosthalee, the chief finance officer of Larsen & Tourbo.
“It is more of risk aversion of these global lenders than the credibility of Indian companies,” he added. Deosthalee is also a member of the liquidity committee recently set up by the finance ministry.
The global financial market is suffering from fear, where banks and institutions are holding on to their cash position and not lending, particularly in the long term and that too to emerging markets such as India, said A Suba Rao, the chief financial officer of GMR Infrastructure.
| THE DROP ZONE (overall market Cap & FII Holding) | ||
| Peak | Till date | |
| Sensex (points) | 20,873 | 10,683 |
| GDP ($ bn)1 | 1,062 | 879 |
| Market capital ($ bn) | 1,895 | 648 |
| Market Cap / GDP (%) | 178 | 74 |
| Exchange rate | 39.3 | 48.97 |
| FII holding (%) — Overall | 16.17 | 14.65 |
| Value of FII holding — Overall ($ bn) | 306 | 95 |
| Note:1) GDP under Till Date Column has gone down due to rupee depreciation only.2) Till Date - Oct 21, 2008 Source: Bloomberg, JM Financial Estimates | ||
However, the relaxation in norms would help in bringing the funds already raised by Indian companies, but parked outside, Rao said. At the same time, bringing money to India at such volatile exchange rates, when the Indian currency is slipping, would increase the risk profile of the company, he added.
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GMR Infrastructure had raised $350 million in 2007 at 180 basis points over Libor to meet the foreign exchange requirement for importing equipment at the Delhi airport. A large portion of this fund is still in the bank as it has not imported the equipment.
Experts feel the new norms announced by RBI would be a deterrent in this market as the rate of interest for long-term funds is around 800 basis points above Libor. “It is a well-known fact that the credit-swap ratio of some of the Indian banks is between 550 and 1,200 basis points above Libor. To raise seven-years fund at 500 basis points above Libor is very difficult,” said a leading banker on the condition of anonymity.
On Weadnesday, RBI relaxed the ECB norms, allowing Indian companies to raise debt up to five years at 300 basis points above Libor and for the longer term, at 500 basis points above Libor.
“When the dollar was pouring into the Indian market through the portfolio route or the debt route in 2007, the government virtually clamped down to stop the inflow. Now, it is trying to reverse the direction when no one is willing to invest,” said a chairman of a leading financial institution.