Industry needs bring relaxation to ECB norms

Author: | Published: 1 Aug 2012
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New ECB limits should help India’s struggling airline industry

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 projects' category.

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.

Overseas funds

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 development.

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 September 2011.

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."

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