|New ECB limits
should help India’s struggling airline
In the Union Budget 2012/13, the Government of India (GOI)
raised the external commercial borrowing (ECB) limits for
various industry sectors across India including power,
aviation, roads, and low-cost housing.
In the airline industry, for example, Indian airlines will
be allowed to use ECBs for one year to raise working capital,
subject to a ceiling of US$1 billion. Short of funds and
struggling to repay debts, Indian airlines have found it
difficult to raise overseas loans as foreign lenders have been
unwilling to expose themselves to too much risk to finance an
industry that is already bearing a heavy debt and interest
burden and which continues to experience loss.
For the power sector, existing projects will be allowed to
raise funds through ECBs to swap their high-cost rupee debt.
The power industry sector, however, continues to experience
challenging times due to rising fuel costs.
The GOI has also allowed ECBs for capital expenditure on the
maintenance and operation of toll systems for roads and
highways across India.
Finally, ECBs for low-cost affordable housing projects are
now allowed. The National Housing Bank might use the ECB route
to collect cash and distribute loans to players whose projects
do not fit neatly into the 'low-cost affordable housing
To reduce the cost of external borrowings, the GOI has also
reduced withholding tax on interest payments on ECBs from 20%
to 5% for the following seven industry sectors: power; civil
aviation; roads and bridges; ports and shipyards; affordable
housing; fertilizer; and dams.
The GOI is looking to boost overseas funds for local
industries and projects, and some practitioners say that
expanding overseas debt is inevitable as the capacity of
domestic banks is insufficient to meet the financing needs of
all projects in India under the current pace of
Trilegal partner Ameya Khandge says: "Rupee interest rates
are hiking very fast, and industry players have found it harder
and costlier to raise funds domestically. Many of them are
trying to seek dollar funds, which are normally of lower cost.
However, dollar fund suppliers are normally a lot stricter when
it comes to issuing loans."
Facing difficulties raising dollar funds, many industry
players have started to look to funds from China. "Firms have
started to actively look to RMB. Many players in the power
sector are starting to seek funds from China because the credit
requirements for seeking dollar funds are relatively high at
the moment," says Khandge.
The share of ECBs has been expanding in India's debt market
in recent years. A compound annual growth rate of 27.4% was
registered for ECBs between 2006 and 2011, while India's share
in external debt has climbed up to 30.3% since the end of
The current liberalisation on ECBs does not, however, mean
that demands on domestic bank loans will reduce, says Khandge's
fellow partner Akshay Jaitly. "It doesn't mean that overseas
funds are taking domestic demand away from domestic banks," he
says. "Many companies are still seeking funds from domestic
banks. The situation is only reflective of the fact that
domestic funds are no longer able to keep up with domestic
demand. For instance, many Indian banks have already reached
their borrowing limit for the infrastructure sector."
The GOI has previously been quite protective towards
domestic banks and the regulations in place are greatly
favourable towards them, adds Majmudar & Partners' managing
partner Akil Hirani. "However, domestic loans are no longer
adequate to finance different industries in India and it is
important to boost overseas funds to accommodate current
financing demand," he says. "The GOI's decision to liberalise
the ECB regime is clearly reflective of the situation."
to return to IFLR supplements