Below is the synopsis of an article published in Business Line. Seems very a very pragmatic solution to the difficulty the India Inc. is facing (other than the Tata’s and the Reliance’s of the world) in raising ECB in the current global economic scenario.
RBI’s latest rationalisation and liberalisation of ECB norms, announced on Sunday does provides emphasis on monitoring ECBs to keep the country's external sector in good stead, however it is shying away from revising all-in-costs ceilings (‘trees') for contracting ECBs, nevertheless, defies reason.
It is not less than 18 months since the RBI last revised the all-in-cost ceilings — referring to the maximum spreads over the six-month London Interbank Offered Rate (LIBOR) at which Indian corporate are allowed to contract ECBs.
· Spreads over six-months LIBOR of 200 bps for trade credit,
· 300 bps for 3-5 year loans, and
· 500 bps for five years and above
These all in cost ceiling spreads against the backdrop of the ongoing turmoil in global markets, particularly following the European sovereign debt woes and downgrading of some big European banks and US sovereign downgrade are making the lending inherently unviable from a lenders' standpoint and are guaranteed to keep out dollar inflows through the ECB route. Among other things, it has led to a huge shortage of dollars, which, despite the S&P downgrade of US sovereign debt, remains the lone safe haven currency that all investors are scurrying to.
True, the situation now is not as grim as in 2008, when banks refused to lend at all, holding on to cash for their dear life. But reports from foreign banks and the foreign offices of Indian banks indicate that dollar funds are hard to come by. Even if available, they are at much higher spreads over LIBOR than what the existing all-in-cost ceilings permit.
This has implications for the ability of Indian corporate – barring perhaps the Reliances or the Tatas – to access the ECB route to fund their trade finance and capex requirements and alleviate to some extent the problems on account of spiralling rupee interest rates.
There is an urgent need to raise the all-in-cost ceilings, especially given the rapid slide in the rupee, which has negative implications for oil companies already grappling with stubborn crude prices. Policy ‘stasis' on this front makes no sense in a volatile rupee-dollar exchange rate environment. On the contrary, the all-in-cost ceiling could potentially be used as a dynamic tool to turn the ECB tap on and off whenever the regulator requires – the ceiling being raised when we want forex inflows and vice versa.
Doubters would, of course, worry about the possible inflationary impact of huge foreign fund inflows in to the system resulting from a hike in the all-in-cost ceiling. However, one must understand that there is already a $30 billion annual cap for the quantum of ECBs to take care of this. Besides this overall cap – which, one trusts, would have been factored in domestic money supply growth calculations – there are sectoral/purpose-tied restrictions on the utilisation of ECBs, which can also address any attendant inflationary consequences.
Moreover, we strongly believe that the money supply based concerns related to inflationary pressures are irrelevant in the present Indian macroeconomic scenarios as the inflation is more a resultant of the supply side pressure and constraints, higher crude and Agri prices and not fuelled by the demand-side because of excess liquidity into the system.
Thus, we believe that given the opinion of the experts and also a demand from the industry for this, RBI might consider raising the ceiling and hence making way for the non blue chip India Inc. to
