The Reserve Bank of India (RBI) has opposed the proposal to allow refinancing of rupee loans with external commercial borrowings (ECBs). The idea was earlier suggested by the Deepak Parekh Committee on infrastructure financing. The Central bank is also not in favour of allowing housing finance companies to raise funds through the ECB route.
Corporate houses, particularly those from the real estate sector, have been eyeing the ECB route as interest rates on such loans are about 4% cheaper than that on domestic debt.
However, the central bank is of the opinion that allowing refinancing of rupee loans with ECBs will lead to huge foreign capital inflow in the economy which will create problems in liquidity management and result in currency appreciation. According to latest RBI data, net mobilisation under ECBs almost doubled to Rs 88,472 crore during 2006-07 (April-March) from Rs 45,078 crore a year ago.
The Parekh committee had recommended the refinancing of loans observing that foreign financiers might not be keen to participate in projects initially, but might be willing to lend after a certain period when the project risk subsided. This way, it was expected, the domestic lenders would be able to exit the project while overseas financiers will have to option to invest at a less-risky stage.
RBI has given similar reasons for opposing ECBs in realty. At present, although housing finance companies can issue foreign currency convertible bonds, they are not allowed to raise money via the ECB route. The housing and urban development ministry as well as a number of HFCs had urged the government to open the ECB route. HFCs argued that if they were allowed to access cheaper funds overseas, they would pass on benefits to borrowers. But RBI feels permitting HFCs to raise ECBs would indirectly open up another channel of overseas financing for realty, again creating foreign capital inflow.
RBI?s move seems in step with its focus on slowing down the flow of external debt to realty. The government has barred real estate firms setting up integrated townships from raising ECBs.