As foreign loans are cheaper than raising funds domestically, external commercial borrowings (ECBs) are an attractive option for infrastructure players looking to finance projects. In a recent policy amendment, the Reserve Bank of India (RBI) eased ECB norms for the infrastructure space to facilitate fund flow to the sector through this route.
Size and growth
Between 2011-12 and 2016-17 (till September 2016), over $80 billion worth of funds were raised through ECBs. During 2015-16, ECBs amounting to $17.16 billion were garnered, an increase of around 4 per cent compared to the $16.44 billion in the preceding fiscal year. Sector-wise, oil and gas captured the leading share of the total ECB-sourced funds, followed by infrastructure finance, telecommunications and power. Other sectors that resorted to ECBs include ports and shipping, renewable energy, aviation, roads and diversified players.
However, the first half of 2016-17 experienced low ECB activity owing to a number of reasons. Offshore borrowings by infrastructure companies stood at $3.8 billion, which constitutes only 22 per cent of the total ECBs in 2015-16. The amount has fallen by around 57 per cent as compared to that raised in the first half of the previous year. Softening of oil prices has disincentivised oil exploration and production companies from undertaking further investment, thereby reducing the demand for foreign currency. Excessive leverage of large companies has also satiated their appetite for further foreign borrowing. The slowdown in investment and sustained weakness of the rupee are the other factors contributing to the slump in offshore borrowings.
Changes in ECB framework
RBI’s revised policy framework for ECBs came into effect from December 2015. This framework comprises three tracks, on the basis of loan tenure and the amount raised. Companies in the infrastructure and manufacturing sectors can raise up to $750 million under the automatic route every fiscal year under all three tracks.
In March 2016, RBI further eased ECB norms for the infrastructure sector. Infrastructure companies, non-banking finance companies (NBFCs), holding companies and core investment companies (CICs) that lend to the sector have been permitted to raise ECBs with a minimum maturity of five years, subject to 100 per cent hedging. While infrastructure companies can use the ECB proceeds raised under Track I for all the end-uses permitted under this track, NBFCs will be allowed to raise ECBs only for financing infrastructure. Holding companies and CICs can use foreign loan proceeds only for on-lending to special purpose vehicles.
Impact of the revised framework
RBI’s move will make it easier for infrastructure companies to raise funds as well as to refinance costlier debt, as loans with shorter maturity are cheaper than long-term borrowings. It will open up opportunities for a diverse set of borrowers as they can now borrow at a rate more competitive than the available domestic rates. NBFCs in the infrastructure space were earlier allowed to raise ECB funding, but there were certain limitations. By categorising NBFCs as infrastructure, RBI has made it easier for them to raise additional resources of up to $750 million per annum. But the 100 per cent hedging condition could be a deterrent as firms will need to factor in this cost while accessing the ECB market.
In sum
So far, foreign investors have parked their funds in domestic companies to take advantage of the interest differential and the favourable currency environment. More recently, fewer domestic companies are seeking loans in offshore markets due to stressed balance sheets, falling commodity prices, and the status quo on interest rates in the domestic market. On the policy front, the enforcement of new ECB guidelines is expected to kick-start ECB issuances in the country after market corrections occur.