<div><em>The Centre and Mint Road wants to ensure that India Inc is not starved of funds – who know what happens after a Fed Rate hike. <strong>Raghu Mohan</strong> explains</em><br><br><br>In a bid to widen the pool of capital sources for India Inc to drink from, the Reserve Bank of India (RBI) is to weigh the option to allow firms to borrow from global long-term fund dispensers.</div><div> </div><div>In its draft framework for external commercial borrowings (ECBs), Mint Road said India Inc can tap pension funds, sovereign wealth funds (SWFs) and insurance funds as part of a revised ECB policy which is on the anvil. The draft paper (which has been placed for feedback till October 1) on ECBs also proposes to lower the all-in cost borrowing by 0.50 per cent (50 basis points) to ensure funds borrowed from abroad are at a reasonable interest rate.</div><div> </div><div><table align="right" border="1" cellpadding="2" cellspacing="2" style="width: 200px"><tbody><tr><td><img alt="" src="http://bw-image.s3.amazonaws.com/Raghu-Mohan-mdm.jpg" style="width: 200px; height: 200px; margin: 1px;"></td></tr><tr><td><strong>Raghu Mohan</strong></td></tr></tbody></table>In effect what it means is that India Inc (to the extent it can borrow liberally from SWFs and pension funds) will able to hook into long-term sources of capital. It is worth to recall here what RBI deputy governor S S Mundra, explained at a summit on ‘Financing India’s Growth - Way forward’ in New Delhi on 9th September 2015.</div><div> </div><div>He pointed out that traditionally, like other emerging markets, Indian economy has been bank-dominated. So whether it is for project development, or working capital needs of corporates, banks have been the primary source of credit. Though primarily banks are supposed to undertake maturity and liquidity transformations, there are limitations on the extent of asset-liability mismatches they can run on their books. In simple terms what it means is that banks raise short-term deposits between one and three-year’s maturity; and they can’t be expected to finance long-gestation projects (like say in in infrastructure) of 15 years or more.</div><div> </div><div>The large scale distress being witnessed in banks’ infrastructure portfolio also raises issues about their ability to critically appraise such projects. The typical role for the banks in mature markets is to originate loans and then distribute to other willing players in the market. They predominantly undertake working capital finance and provide structured financial solutions to their clients. They also act as market makers for various financial sector products.</div><div> </div><div>“With the gradual widening and deepening of our financial markets, it would be fair to expect our banks to also gradually shift their focus to SME and retail clients while leaving the long-term resource contribution to other players including pension funds and insurance companies which have long-duration liabilities on their balance sheets”, said Mundra.</div><div> </div><div>The urgency shown by (to the extent the feedback deadline is 1 October) shows that the Centre and Mint Road wants to ensure that India Inc is not starved of funds – who know what happens after a Fed Rate hike. Moreover, many a state-run bank is no position to lend too given the precarious nature of their books and pressure on capital ahead of Basel-III capital norms which kick in from fiscal 2019.</div><div> </div><div>It’s not a surprise that on Wednesday, Union Economic Affairs Secretary Shaktikanta Das said that “we cannot have the luxury of giving two months’ time for discussion because enough has been said and enough has been heard. Now, the time has come to decide and move forward”. He was speaking at the ‘Global Investors India Forum’ organised by Assocham.</div><div> </div><div>Mint Road said that the proposed guidelines are aimed at replacing the ECB policy with “a more rational and liberal framework, keeping in view the evolving domestic as well as global macroeconomic and financial conditions, challenges faced in external sector management and the experience gained so far”. The basic thrust of the revised framework, RBI said, is to retain more qualitative parameters for the normal (foreign currency denominated) ECBs and to provide more liberal dispensation for long-term borrowings in foreign currency.</div><div> </div><div><strong>What’s On The Anvil</strong></div><div><strong>Basic Structure</strong>: Retention of the existing basic structure of ECB framework for normal foreign currency borrowings with certain liberalisations made based on experience. The restrictions on eligible borrowers, end-use (capital expenditure), maturity (not less than three to five years) and all-in-cost (linked to a spread over Libor) for such ECBs will continue.<br> </div><div><strong>Lenders/investors:</strong> Expansion of the list of recognised lenders to include entities having long term interest in India. Overseas regulated financial entities, pension funds, insurance funds, sovereign wealth funds and similar other long term investors are included in the list of recognised lenders for long-term funding into India.<br> </div><div><strong>Long-term foreign currency borrowing</strong>: Prescription of only a negative list of end uses for long-term foreign currency borrowings (minimum maturity of 10 years).<br> </div><div><strong>Rupee denominated borrowings:</strong> Prescription of more liberal stipulation for rupee-denominated ECBs with only minimum maturity stipulations. The borrowing can be accessed for all purposes save a small negative list.</div><div> </div>
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Raghu Mohan is an award-winning senior journalist with 22 years of experience. He has worked for BW Businessworld since December 2006, and is currently its Deputy Editor. His area of expertise is banking – commercial, investment, and the regulatory. Previous stints include those at The Financial Express and Business India.
