External borrowings norm for NBFCs eased

The government relaxed on Friday rules for external commercial borrowings, allowing non-banking finance companies to raise overseas loans, subject to approvals.

A finance ministry statement said that housing finance companies, with approval from the Reserve Bank of India, would be allowed to issue foreign currency convertible bonds.

The government also raised the repayment limit of external commercial borrowings to $200 million from the current $100 million

The Housing Development Finance Corporation (HDFC) is likely to be the first off the block among housing finance companies to raise an FCCB.

The corporation had already taken shareholder approval in July 2004 to raise $500 million.

HDFC is also likely to raise funds through the ECB route in keeping with its past practice of raising at least 10 per cent of funds from the overseas market.

Eighteen months back, the government had clamped down on housing finance companies from raising funds through the overseas market.

This was a dampener for many housing finance companies, which had a preference to part fund their requirement from the overseas market.

Many finance companies including Housing and Urban Development Corporation as well as HDFC had earlier submitted proposals to the central bank for raising ECBs.

"Overseas funding is attractive today considering that the 5-year US swap rate stands reduced to below 5 per cent for the first time in a year," said a senior treasury official at a leading NBFC. The 5-year swap rate is usually used to price convertible debentures.

Overseas interest rates have seen a fall in the past couple of months. HDFC for instance, refinanced its earlier ECB at London inter-bank bid-offer rate (Libor) plus 41 basis points (bps), down from Libor plus 85 bps.

The refinancing of the balance amount of $110 million (12 billion yen) has saved the housing finance major 45 basis points, stated industry sources.