India just made it easier for companies to borrow money from overseas

• All companies that are eligible for foreign direct investment can now raise funds from overseas creditors under the automatic route.
  
• More importantly, all sector-wise limits have been scrapped, with a blanket overseas borrowing cap of $750 million on an annual basis for all companies.
  
• The move is expected to alleviate a domestic liquidity crisis, and prop up the rupee by attracting more foreign funds to Indian markets.
  

Following pressure from the central government, the Reserve Bank of India (RBI) has further eased norms that govern the borrowing of overseas funds by domestic entities.

The move is expected to alleviate a domestic liquidity crisis, and prop up the rupee by attracting more foreign funds to Indian markets. This, in turn, will allow companies to support their expansion plans and also sustain GDP growth as the government moves into election season.

India’s central bank outlined the changes in a circular on January 16th, explaining that they would improve the “ease of doing business” in the country.

In addition to banks and financial institutions, all companies that are eligible for foreign direct investment can now raise funds from overseas creditors under the automatic route. Even NGOs, port trusts and cooperatives have been allowed to take advantage of this fundraising mechanism.

The RBI has also done away with the original four-tiered system of borrowing, which categorises bonds based on maturity time, and divided the scheme into two segments- one for rupee-denominated bonds and one for bonds in all other currencies.

More importantly, all sector-wise limits have been scrapped, with a blanket overseas borrowing cap of $750 million on an annual basis for all companies. In addition, the minimum term limit for all instruments has been set at three years.

Quite simply, India’s commercial banks don’t have the cash-on-hand to boost credit growth to the corporate sector. Burdened with non-performing loans, their medium-term financial strength hinges on a few large resolutions under the Insolvency and Bankruptcy Code.

In an interview with ET, Rashesh Shah, the former president of FICCI, said that India would have to record a credit growth of at least 15% to sustain economic growth. Credit growth came in at a 12.5% on a year-on-year basis as of September 2018.

To make matters worse, India’s shadow banks, which have stepped in to fill the funding gap in the last few years, have been facing a cash crunch of their own following a series of defaults by IL&FS, India’s largest infrastructure lender.

Not will the easier overseas borrowing norms allow India’s commercial banks to raise funds from abroad to support their domestic lending operations, but it will also enable companies to raise their own debt from overseas investors without having to turn to domestic banks.

The RBI has, however, decided to retain some curbs on the overseas borrowing programme. Companies cannot raise debt from overseas through this route for the purpose of real estate purchases, investment in domestic equity markets and the repayment of rupee-loans. In addition, the cap on all external commercial borrowing will continue to be 6.5% of GDP .


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