Wednesday, May 12, 2010

Core sector to get more foreign cash


Source :FC : Rajendra Magan Palande May 11 2010

NBFCs can raise 50% of owned funds abroad
The Reserve Bank of India (RBI) has further opened the window for overseas borrowing by non-banking finance companies (NBFCs) that fund infrastructure projects.

These NBFCs, classified as infrastructure finance companies (IFCs), have been allowed to borrow up to 50 per cent of their owned funds from abroad under the automatic route, subject to compliance with prudential guidelines.

However, this limit includes all outstanding external commercial borrowings (ECBs).

All other aspects of the ECB policy, including the $500 million limit per company per financial year under the automatic route, remain unchanged.

ECBs by infrastructure finance companies above the 50 per cent limit require RBI approval.

Archana Capoor, chairman and managing director of Tourism Finance Corporation of India (TFCI), told Financial Chronicle that the RBI move would enable infrastructure finance companies to access funds at a cheaper rate.

“Unlike banks, companies like TFCI do not have access to cheaper funds. With the ECB window liberalised, we can easily raise funds from the overseas market at a much cheaper rate with Libor presently at 0.5 basis points and make a good spread,” she said.

But Hemant Kanoria, chairman and managing director of Srei Infrastructure Finance, said the RBI move was very small.

“This move will not serve any objective. The RBI should have allowed infrastructure finance companies to raise funds overseas four to five times their net worth under the automatic route. The current allowance hardly leaves any room to raise much money,” said Kanoria.

The impact of the relaxation of RBI’s ECB norms for infrastructure finance companies will depend significantly on the net worth of the company.

Srei Infrastructure Finance, with a net worth of Rs 694 crore on March 31, 2009, will be able to borrow just half of it, Rs 347 crore, a very small amount.

Infrastructure Development Finance Company (IDFC), with net worth of about Rs 7,000 crore, can now borrow Rs 3,500 crore from foreign lenders. But given IDFC’s loans of Rs 26,543 crore on March 31, 2010, any potential foreign borrowing would not add much.

India has huge gaps in financing its planned infrastructure projects. The government plans to execute infrastructure projects worth more than $500 billion in the next few years.

The absence of a very long-term debt market in India has resulted in front-loading of tariff to service debt, which is detrimental to the interests of consumers. Infrastructure projects ideally need debt with a repayment period of at least 15-20 years.

RBI has been taking steps to ease the flow of funds for infrastructure development. Last month, it allowed banks to categorise investments in bonds issued by infrastructure companies as “held to maturity” so that lenders need not value them based on market rates.

(With inputs from Sarbajeet K Sen and Rajesh Gajra, New Delhi)

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