In the last few days, the Reserve Bank of India (RBI) has issued a string of circulars to liberalise the policy on external commercial borrowings (ECB). The include the following:
- utilisation of 25 per cent of the fresh ECB raised by a company in the infrastructure sector towards refinancing of the Rupee loan/s availed by it from the domestic banking system, under the approval route;
- import of capital goods by companies in the infrastructure sector by availing of short-term credit (including buyers’ / suppliers’ credit) in the nature of 'bridge finance', under the approval route;
- general rationalisation and liberalisation, such as (i) enhancement of ECB limits under the automatic route for borrowers in the real sector-industrial sector-infrastructure sector, and in specified service sectors viz. hotel, hospital and software, (ii) designation of certain ECBs under Indian rupees, and (iii) the permissibility of using ECBs for meeting interest during construction (IDC) in the infrastructure sector;
- provision of credit enhancement by certain foreign equity holders to the Indian companies in the infrastructure sector; and
- clarification regarding ECBs by foreign equity holders.These measures not only seek to encourage greater foreign lending to the infrastructure sector, which generates a great demand for financing, but it also helps Indian corporates borrow internationally on more favourable commercial terms given the constant enhancement of interest rates by the RBI that makes domestic borrowings quite expensive. At the same time, there are concerns that these changes may only cause minimal impact, and that more needs to be done, as discussed here and here.