Hawk-eyed scrutiny of FX loans likely to go on

The central bank is unlikely to relax norms on borrowings from abroad even as raising money overseas is expected to gain momentum in the near term on the back of cheaper cost of funds and higher risk appetite of investors.

?When ?busy? season starts in India, you will see credit hopefully picking up all together, which means external source for credit will also go up,? said Ananath Narayan, managing director and head-rates, FX and credit, South Asia, Standard Chartered Bank.

The six-month ?busy? season ? when business activity typically increases ? starts next month. In contrast, in April-September, business activity is said to be ?slack?. In last 10 days, Jet Airways and Reliance Communication separately said they would like to tap overseas debt market to refinance existing debt with cheaper funds.

Currently, entities in some sectors and to meet specific purposes may borrow overseas without prior approval of RBI. Companies in other sectors may need to get green light for taking debt from overseas.?Repayment of rupee loans from overseas loans is not permitted except by telecommunication companies that successfully bid for third-generation mobile spectrum licences.

Interest in external commercial borrowings, or ECBs, declined because of debt crisis in some European countries, said Narayan.??In May, June and July, when there was sovereign debt crisis, there was reduction in appetite for any kind of risk,? Narayan said. So, overseas investor interest in lending to emerging markets such as India was low.?With that out of the way and investors seeking higher yields and Indian projects needing financing, borrowing via ECB route by Indian companies could go up going forward.

?As long as there is no return to the sovereign debt crisis, the demand would be strong. We should see pick-up going forward,? he said. IDBI Bank Executive director RK Bansal is of the view that although demand for ECBs has picked up, large borrowings by infrastructure companies may not occur due to strict guidelines. ?ECB in infrastructure is slightly difficult as you have to satisfy that project can repay within some years or cash flow will be sufficient,? he said.

In March-July, total amount raised through the ECB route was $10.8 billion compared with $5.8 billion in the same period last year. At least two companies have said they may consider tapping overseas loans to repay rupee loans.

This week, mobile services provider Reliance Communications said it was exploring the ECB route to bring down its cost of funds by refinancing local rupee-denominated debt that was used to pay for third-generation mobile spectrum, a company official said.

?We are looking at ECBs (because) overseas interest rates are almost half of that in the domestic market,? the official said, adding local rates hovered at 8.5-9.0%.??We require huge amount of funds,? he said. As only bidders for the 3-G licence can repay rupee loans with ECB proceeds, Jet Airways last week sought RBI?s approval to do so. It wants to raise Rs 3,450 crore of ECB.

India?s growing economy will put pressure on RBI to relax ECB rules.??The country needs Rs 46,70,000 crore funds over the next five years,? said Anil Sureka, Ispat Industries executive director for finance. He wants government intervention to allow companies such as his to access cheaper finance from overseas.

?Something needs to be done by the government. Government claims there is enough liquidity in the market, but that is not bringing down the borrowing costs,? he said. Ispat Industries has Rs 6,700 crore net debt on its books. Two or three years ago, Ispat had through an industry organisation asked RBI to allow companies to repay rupee loans from ECB proceeds, Sureka said.

Narayan was of the view the central bank may not allow companies from all sectors to raise ECBs. ?RBI has been very watchful when it comes to ECB and money coming in through debt route. I think they will continue to be watchful,? Narayan said.

Even if RBI relaxes rules, it will prefer to allow borrowings by sectors such as infrastructure.??In my opinion, it is unlikely that RBI will consider allowing (ECB access) across the board,? he said.