Pick-up in ECBs to improve investment?

Source : IBNS
Last Updated: Wed, Nov 07, 2012 18:52 hrs

New Delhi, Nov 7 (IBNS) After two months of low key activity in the external commercial borrowing (ECBs) in June and July, India Inc stepped up raising resources from the ECBs from August again with the inflows rising up to US Dollar 2.78 billion in September, 2012, an ASSOCHAM analysis found.

Besides, contrary to a perception that the companies are resorting to ECBs in their desperate moves to roll over the Foreign Currency Convertible Bonds (FCCBs) due for redemption, a majority of the ECB issues during the past seven months since March were utilized for modernization and import of capital goods.

According to the ASSOCHAM analysis, despite a sharp depreciation in rupee value against the US dollar, raising debt in the overseas market still works out cheaper.

As against 11-13 per cent interest on the domestic bank loans, the ECBs can be accessed at around four per cent per annum. On loans as large as 200-500 million US dollar , the arbitrage between the domestic and foreign interest rates is big enough.

With low interest rates in the overseas market, interest cost can be brought down by almost half even after the costs of hedging are factored in, the ASSOCHAM analysis said.

"A large gap in the lending rates between the domestic and overseas resources is forcing India Inc to look abroad for funds. This only reinforces our long-pending demand for a low interest rates regime within the country," ASSOCHAM President Rajkumar N Dhoot said .

He said the RBI should realize that if the industry is able to bring down its cost of borrowing and consequently the production, the inflation rate would logically come down. "Thus, there is no point choking the demand. It makes more sense to rather supply," Dhoot said.

Further analysis of the official data on ECBs indicates that mostly the ECBs were used for modernization, followed by new projects and the import of capital goods.

For example in September, out of 86 ECBs, 18 were for meant for raising resources for modernization of operations, 17 for new projects and 15 for import of capital goods.

While different maturity periods are available for the ECBs, the most preferred maturity is that of five years.

"In a way, the utilization pattern of ECBs is still reassuring in the sense that the money is to be spent for investment and modernization even when the industry is grappling with the slowdown," the ASSOCHAM said.

The recent policy changes insofar as the ECBs are concerned are proving helpful, the ASSOCHAM said.

As per the revised guidelines, an entity can go in for the ECBs upto 75 per cent of the of the average foreign exchange earnings in the immediate past three years or 50 per cent of the of the highest forex earnings in any of those three years, whichever is higher.

The ECBs also hold attraction as the interest rate scenario in most parts of the world is quite attractive.

Besides, enough liquidity is also available even in the developed markets with the easing of resources by their central banks.

While part of the monetary easing is going into the global commodity trading, the interest rates have more or less have remained soft.

If the Indian firms manage the ECBs well through a proper hedging and professional risk management methods, India Inc can make a good use of this source. Besides, these inflows would be good even for the rupee value, the ASSOCHAM said.

Funds raised through External Commercial Borrowings between March-September, 2012 (In USD million)

March 3836 million

April 2732 million

May 3370 million

June 1996 million

July 1070 million

August 2368 million

Sept 2776 million

Source: RBI

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