RBI raises ceiling for external commercial borrowings

The Reserve Bank of India on Tuesday raised the limit of external commercial borrowings by any individual company or group. As per the new regulation, a company can borrow offshore funds to the tune of 75% of the average foreign exchange earnings in the immediate past three years or 50% of the highest foreign exchange earnings realized in any of those three years, whichever is higher.

Currently, a company is allowed to raise 50% of the average annual export earnings during the same time mentioned above.

"RBI is definitely working towards increasing foreign currency supply in India," Moses Harding, head of asset liability committee and economic research at IndusInd Bank told moneycontrol.com.

"This measure is likely to serve the twin benefits. While it will bring some stability in rupee's movement against the U.S. dollar, the high rate of inflation too can be controlled on account of lower input costs. Importers are benefitted as rupee becomes strong from steady. No doubt, it will prompt a positive sentiment in the market," he said.

Moreover, RBI sets a maximum cap of USD 3 billion or around Rs 16,605 crore above which a company or group will not be able to borrow funds from foreign countries.

"Indian companies will save interest cost through this measure. They can raise cheap money from offshore market and repay their rupee loans back home. This will increase foreign exchange flows in India. The measure will protect our country from the economic vulnerability on external front," said  Brinda Jagirdar, general manger (Economic Research), the State Bank of India (SBI).

Under the current scenario, a rated Indian company pays around 11.50-12.50% rate of interest on its bank loans (assuming base rate at 10.50%). The same entity can roughly get a loan through ECB scheme at below 4% depending on its credit worthiness. However, the cost of currecny heding varies from 4-6% depening on tenure (6 months - 1 year).

"In case of Special Purpose Vehicles (SPVs), which have completed at least one year of existence from the date of incorporation and do not have sufficient track record/past performance for three financial years, the maximum permissible ECB that can be availed of will be limited to 50% of the annual export earnings realized during the past financial year," said a RBI release.