Multilateral loans for banks likely

The Reserve Bank of India (RBI) is reviewing its policy of not allowing multilateral agencies to provide loans to banks.

Banking sources said the review might result in multilateral agencies such as the International Finance Corporation (IFC) and Asian Development Bank (ADB) being allowed to lend to banks and financial institutions, including public sector banks.

The review is part of capital account convertibility issues that relate to lending in India by multilateral agencies, corporates and foreign institutions.

Under the review, the lending by multilateral agencies to banks would be under the overall cap on banks' overseas fund raising.

At present, banks can raise funds overseas up to 50 per cent of their Tier I capital, which includes equity capital and reserves. The limit was raised from 25 per cent to 50 per cent in the last quarterly monetary policy review in October.

The central bank is, however, engaged in a debate on the foreign exchange risk arising out of such lending and counterparty for such risk.

The sources said the RBI was of the view that the foreign exchange risk will have to be borne by the borrowers if the funding is received in foreign currency and by the lending agencies if the funds are brought into the country and swapped into rupees for on lending.

Multilateral agencies have shown great interest in investing in the Indian financial institutions specially through loans and advances.

The preference is markedly high for public sector financial institutions and banks since these loans will have the backing of sovereign guarantee making them quasi-sovereign in status.

The report on fuller capital account convertibility has suggested that foreign institutions and corporates should be allowed to raise rupee resources in India with an option to convert into foreign exchange for purposes including onlending in India. At present, only multilateral institutions are allowed to issue rupee bonds in India.