In a major boost to Indian banks having overseas branches, the Reserve Bank of India (RBI) on Wednesday allowed them to refinance External Commercial Borrowings (ECBs) of corporates, Navratna and Maharatna PSUs by raising fresh ECBs.
“In order to provide a level playing field, it has been decided, in consultation with the government, to permit the overseas branches/subsidiaries of Indian banks to refinance ECBs of AAA rated corporates as well as Navratna and Maharatna PSUs, by raising fresh ECBs,” said the RBI in the fifth bi-monthly monetary policy statement.
Currently Indian corporates are permitted to refinance their existing ECBs at a lower all-in-cost. However, the overseas branches/subsidiaries of Indian banks are not permitted to extend such refinance. “The decision in allowing subsidiaries of Indian banks abroad to refinance AAA rated corporates will provide a fair and just opportunity to Indian banks to book and retain good quality assets.” Rajnish Kumar, Chairman, SBI said.
ECBs are mainly foreign currency loans raised by Indian companies from non-resident lenders using instruments like commercial bank loans, buyers' credit, suppliers' credit and floating rate notes and fixed rate bonds etc. The DEA (Department of Economic Affairs), Ministry of Finance, government of India along with RBI, monitor and regulate ECB guidelines and policies. Meanwhile, the RBI will issue a revised guideline within a week.
Over the past few years, India companies have taken advantage of the lower interest rate in the overseas market and raised funds through ECBs. According to experts, with RBI permitting Indian banks’ foreign arms to refinance ECB will improve liquidity for refinancing and lead to reduced cost of borrowing for Indian companies.
Indian banks can now actively participate in the loans which are being refinanced and negotiate for better rates. Arun Thukral, MD & CEO, Axis Securities said permission to overseas bank branches/ subsidiaries to refinance ECBs is a key positive from today’s RBI policy. “This move would benefit the prominent private sector banks along with large PSBs,” he said.