| Dollar dreams
New Delhi, March 9: The government is planning to set a lower cap on the rate of interest that domestic companies need to pay on their external commercial borrowings.
The lowering of the interest rate cap is part of the initiative to relax norms for accessing foreign currency loans.
Senior finance ministry officials said the move to place a cap on the interest paid 'is in order to enforce a low interest rate regime as well as to restrict undesirable players from taking advantage of liberal ECB norms.'
In a liberal ECB regime, companies with poor financial track records could access foreign loans by promising to pay high rates of interest.
The government wants to plug this gap by setting a limit, which may be 150 points over the London inter-bank offered rate (Libor). At present, the cap is set at 200 basis points over Libor.
The standard rate at which most companies borrow from abroad is about 125 basis points over Libor. Some of the top-notch Indian corporate houses such as Tata Steel or Reliance Industries borrow funds at Libor or near Libor rates.
The government, which has budgeted Rs 156,467 crore by way of gross market borrowings during the next financial year, wants to allow companies to borrow overseas in a bid to keep domestic interest rates down.
There is already pressure within the economy that could nudge interest rates upwards. The rate of inflation is currently at 5 per cent and is expected to move upwards, even as credit offtake from banks is going up. These two factors ' higher costs and higher demand for borrowings ' could force many banks to jack up rates.
The government, therefore, wants to keep the alternative window wide open to keep rates down. The government may even permit banks to enter the ECB market in order to on-lend in the domestic market.
However, while relaxing the ECB rules, the government does not want to let weak firms borrow abroad and default, thus jeopardising India Inc's overall overseas risk rating.
At the beginning of last year, the finance ministry had relaxed ECB guidelines somewhat by removing end-use restrictions.
The government had said ECBs would be allowed for all corporate investments in the industrial sector, especially infrastructure. But it had retained restrictions on ECB for investments in capital market and in the real estate sector.
All ECBs for a period of three to five years and up to $20 million are now allowed through the automatic route. Similarly, those for more than five years and up to $50 million are allowed through the automatic route. For loans above these ceilings, corporate houses have to approach an empowered committee set up by the Reserve Bank of India.
The new phase of liberalisation follows a period during which the government had actually tightened the borrowing window following a surge in forex reserves. The logic was that too much foreign exchange in India's kitty could see the rupee appreciate to such an extent that exporters would be badly hit.