Such an action, the ASSOCHAM said, will help banks to garner medium/long term funds with a minimum tenure of 3 years from good quality institutional investors.
The chamber further said this borrowing should be over and-above 100% of Tier-I Capital and be considered only for banks with acceptable international risk ratings with minimum tenure of 3 years.
Since the current regulations do not allow entities other than correspondent banks to lend to an Indian Bank, instruments such as Medium Term Notes (MTN) subscribed by diversified set of financial investors are not allowed to be issued by Indian Banks that do not have foreign branches/subsidiaries, said Mr. D S Rawat, Secretary General ASSOCHAM.
Currently, Indian banks without foreign branches/subsidiaries are subject to withholding tax on the interest payment to offshore lenders, which is a function of the country of domicile of the lender and the treaty between India and the concerned country. The withholding tax can be as high as 20%, thus impacting the net landed cost in INR terms. The external commercial borrowings, however, are subject to uniform / withholding tax rate of 5%. In this context, this gap may be bridged thereby making the foreign borrowings more cost competitive.
ASSOCHAM has also suggested that domestic procurement of capital goods, used for manufacturing export merchandise could be allowed funding through FCY (foreign currency) funds to lower cost of borrowings for exporters and also reduce the pressure on rupee.
It has further recommended that banks be allowed to include PCFC (Pre-shipment Credit in Foreign Currency) under their PSL (Priority Sector Lending) on the lines it is permitted to some foreign banks in India.
The RBI in consultation with the government, could also allow dematerialization of bills of exchange issued by large overseas importers against goods received from SMEs, and further enable them to trade in the secondary market akin to commercial paper to ease access to finance for SMEs, extend the swap/special refinance window for Pre-shipment Credit in Foreign Currency (which expired in June 2013) to March 31, 2014 and CRR/SLR applicability on overseas borrowings for PCFC funding may be done away with to enable more cost-effective availability of funds to exporters, added Mr. Rawat.
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