Interest spreads on ECBs to be reviewed, would help small cos to tap cheaper funds

Despite pressure from investment-starved companies, the Centre at present does not intend to increase the limit on external commercial borrowings (ECBs). But bowing down partially to industry demand, it may consider reviewing interest rate spreads on such borrowings.

The finance ministry has so far received various representations to widen the spread of interest rates as against the Libor (London Interbank Bid Rate). With domestic interest rates crossing 9%, such a move would help small companies to tap cheaper funds from abroad and fund their expansion plans.

The interest rate at which Indian firms can borrow funds abroad is linked to the Libor rate. In a review on such borrowings in May this year, the government had increased the interest rate ceilings from 150 basis points to 200 basis points annually over Libor having average maturity of three years. For ECBs with an average maturity of more than five years, the interest rate ceiling was hiked from 250 basis points to 350 basis points annually over Libor.

The government in its review then had also increased the amount of overseas borrowings a company can bring into the country. While companies can now borrow up to $500 million a year, it is limited to $ 100 million for the infrastructure sector and $ 50 million for other sectors. The rest must be invested in units overseas.

Last year, the government tightened ECB regulations to reduce the high capital inflows, which had caused the rupee to appreciate dramatically. Only $ 20 million of the funds raised abroad were allowed to be remitted in India.

But the relaxation in these norms this year has not proved to be very helpful to small and medium tiered companies, which still find it difficult to raise funds abroad. Meanwhile, the RBI has also been increasing interest rates rapidly to rein in double-digit inflation - a measure, which has raised credit costs further and made it more difficult for companies to borrow abroad.

In fact in its monetary policy review last month, RBI raised the short-term lending rate or Repo rate by 0.5% from 8.5% to 9% and the cash reserve ratio (CRR), which is the mandatory deposit requirements for banks by 0.25% to 9% from August 30.

Analysts point out that in the near to medium term, unless there is a dramatic change in the appetite of global investors for risky assets, most Indian companies will have a tough time raising funds abroad.