Centre may put a spanner in cos’ overseas borrowing plans

NEW DELHI: Call It inflation impact. The government, which is going all out to tighten money supply, is now taking a hard look at its policy on foreign borrowings. Early indications suggest that it is unlikely to raise the ceiling on external commercial borrowing (ECB) for FY08 from the current $22 billion. Government sources said new sectors like housing finance companies may not be given ECB access soon. Housing finance companies and real estate developers have been pleading with the government for ECB access for quite some time.

Inflow of foreign funds increases liquidity in the domestic market when part of these borrowings are used to pay back expensive rupee denominated loans. Put simply, cheaper funds raised abroad are used to pay back high-cost loans from domestic markets. This increases liquidity in the system.

The government’s move to retain the ECB cap for FY08 at the current level comes at a time when cost of borrowing in the domestic market is witnessing a steady rise. The government’s move will come as a dampener to companies, considering their large investment plans on the back of a high economic growth. “The ECB cap for the current fiscal may remain unchanged if it is not revised downwards. Also, the government is unlikely to further liberalise the ECB guidelines,” a government source said.

In FY07, the ECB ceiling was raised twice: from $14 billion to $18 billion, and then to $22 billion. The sources said the $22 billion limit for is likely to be reached. Besides lifting the ECB cap, the government late last year allowed developmental financial institutions such as India Infrastructure Finance Company (IIFCL), Rural Electrification Corporation and Power Finance Corporation to raise funds from the overseas markets.

ECBs include commercial bank loans, buyers’ and suppliers’ credit, securitised instruments (such as floating-rate notes and fixed-rate bonds), credit from export credit agencies and commercial borrowings from the private sector window of multilateral financial institutions such as IFC, ADB and AFIC.