NBFCs can now raise foreign loans to meet liabilities

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New Delhi, Oct 31 : The Reserve Bank of India (RBI) on Friday allowed systemically important non-banking financial companies or NBFCs, not accepting public deposits to raise short-term foreign currency borrowings, to refinance short-term liabilities. The maximum borrowings should not exceed the higher of either 50% of the firm’s net owned funds or $10 million, RBI said in a statement issued close of markets.

The move would open up another channel of liquidity for NBFCs which are facing a severe cash crunch at present. These borrowings should be of maximum three years duration and their cost should not exceed a maximum of 200 basis points above London Inter Bank Offered Rate. Further, the RBI said that funds raised through foreign borrowings can be used only for refinancing short-term liabilities and not for booking fresh assets. Most of the NBFC players welcome this move and see this as a step in the right direction. At the moment, though, the initial reaction is that this move would favour NBFC companies floated by overseas institutions and the larger players who would not require any special merchant banking assistance. However, the success of this move needs to be tested both by the regulator and also the players, reckons a senior executive with a domestic NBFC. With the current 6 month Libor at around 4% and a 200 basis points limit, the prospect of borrowing overseas would look extremely attractive to Indian NBFCs. “But the question is who would want to lend to Indian NBFCs at this rate, the spread over Libor will be more.” says a treasury executive. Hence, chances are that the bigger and more reputed NBFCs would be the first off the block to raise these funds.

Companies like GE Money, Fullerton India , Barclays Financial and Citifinancial will be benefit from the central bank’s move. “Multilateral or bilateral financial institutions, reputable regional financial institutions, international banks and foreign equity holders with minimum direct equity holdings of 25% are eligible lenders,” said the central bank in a statement.

The decision follows RBI’s Wednesday notification allowing NBFCs to raise funds through issuing perpetual debt instruments, which can be included in their Tier I capital. RBI has held a series of meetings with the NBFCs over the past two weeks, which have discussed their liquidity constraints with the central bank.