Making sense of the new ECB standards

The Reserve Bank of India last week eased standards for companies taking out external commercial borrowing (ECB), as part of a package of measures aimed at stemming the rupee’s slide. Mint explains the logic and implications of the move.

What are the BCEs taken by Indian companies?

BCEs are commercial loans that qualifying resident entities can take out outside India, i.e. from a recognized non-resident entity. ECBs can be buyer credits, supplier credits, currency convertible bonds, currency exchangeable bonds, loans, etc. request them to RBI through their authorized dealers. Borrowers must adhere to standards on minimum maturity period, maximum total cost cap, end uses, etc.

What is the relaxation offered by the RBI?

In the first week of July 2022, the RBI notified that in the case of ECBs, for a temporary period – until 31 December 2022 – the borrowing limit under the automatic route was increased by 750 million or its equivalent per fiscal year at $1.5 billion. . The overall cost ceiling under the ECB framework has been raised by 100 basis points, subject to the borrower having an investment grade rating. The regulator’s aim was to increase the supply of foreign exchange reserves and thus prevent the rapid depreciation of the rupee seen in recent months.

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What clarity do foreign lenders expect from the RBI?

Lenders want to know whether the investment grade should be rated by national or international agencies. If only by global agencies, this would limit the number of potential borrowers, because companies that might be rated well domestically would not necessarily have obtained the investment grade when they were rated by international agencies.

Why are Indian companies opting for ECBs?

BCEs offer companies the advantage of borrowing abroad at lower interest rates. They are also a means of borrowing a large volume of funds for a relatively long period of time. In addition, borrowing in foreign currencies enables companies to pay for their imports of machinery, etc., thus negating the impact of fluctuating exchange rates. BCEs can help diversify the investor base and available funds at lower cost, thereby helping to improve corporate profitability. ECB interest rates are also a function of their international market ratings.

What are the risks for companies raising ECBs?

Although companies are attracted to ECBs due to lower interest rates, the borrower’s comfort level depends on the stability of the exchange rate between borrowing and debt service periods. The depreciation of the rupiah will increase the debt service burden compared to what was calculated at the time of using the ECB facility. Thus, companies may have to incur hedging costs to cover currency risk.

Jagadish Shettigar and Pooja Misra are faculty members of BIMTECH

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