The Telegraph
Since 1st March, 1999
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Govt tightens screws on foreign loans

New Delhi, Nov. 12: The government today tightened its policy on foreign loans, stating that the maximum spread allowed on external commercial borrowings over the Libor rate for normal projects would be halved to 1.5 per cent from 3 per cent at present.

It also decided against easing the cap on foreign loans by ruling that external commercial borrowings over $50 million would be permitted only for financing equipment imports and infrastructure projects.

A finance ministry statement said no bank, financial institution or non-banking financial company would be allowed access to external commercial borrowings or to provide guarantees for such loans.

It said unused foreign loans would have to be parked overseas and such loans for meeting rupee spending under the automatic route need to be hedged “unless there is a natural hedge in the form of uncovered foreign exchange receivables”.

The decision to tighten foreign loan norms was taken keeping in view a softer domestic loan regime and a growing forex reserves position of $92 billion.

Finance ministry officials said after toying with plans to liberalise the regime, the government decided to play cautious because “we have managed to lower the cost of funds in India and those who need money can very well access it cheaply even here”.

There was intense corporate lobbying for the foreign loan regime to be liberalised. Last month, the Centre had refused permission to the Reliance group to raise an external debt of $500 million. It had instead advised the Mumbai-based conglomerate to approach the domestic debt market as the reasons cited for taking the foreign exchange denominated loan were not considered important enough.

The only major forex debt cleared in recent months was ICICI's $300 million loan taken to help restructure bad debts made to steel majors.

Fund managers, however, saw today's notification as an attempt to block bad loans in the future.

“This basically means the government wants only the top companies to go out and take loans. It does not wish to encourage further increases in the country’s foreign loan portfolio. The reasons are obvious — we have a huge forex reserves position and we don't want to encourage topping it with loans to firms with poor credit track record,” said K. K. Sengupta, an independent merchant banker managing a Hong Kong-based fund's investments here.

The notification issued today said the maximum spread on external commercial borrowings raised for normal projects has been halved to Libor plus 1.5 per cent from the present Libor plus 3.0 per cent.

For infrastructure projects, the government has capped the maximum spread on external commercial borrowings at Libor plus 2.5 per cent from the present Libor plus 4.0 per cent. While for other long-term projects, the maximum spread has been reduced to Libor plus 3.0 per cent from the present Libor plus 4.5 per cent.

The government's decision was also taken in view of the upturn in interest rates abroad. Central banks in the UK and Australia raised rates recently amid signs of a global economic upturn.

However, the Reserve Bank (RBI), after consultation with the government, decided against any such measures. RBI governor Y. V. Reddy said, “Whatever has happened so far in international development and in monetary policy stance and the changes in leading industrial economies has not come as a surprise to us.”

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