Reserve Bank of India governor Sanjay Malhotra clarified on Friday that the relaxation proposed for the real estate sector to access offshore loans applies only to projects that comply with foreign direct investment (FDI) rules, and is not intended for “speculative” purposes.
He also backed a proposal to allow banks to fund mergers and acquisitions, terming acquisition finance as an integral part of the banking industry that will also benefit the economy.
“I wish to clarify that ECB (external commercial borrowing) will be permitted only for FDI-compliant real estate projects and remain prohibited for speculative dealing or loans for land or property trading,” said Malhotra at the SBI Banking and Economic Conclave.
Under the existing ECB rule, such loans cannot be raised for real estate activities.
Relaxation in ECB regulation and allowing banks to finance M&As were among several measures proposed by RBI last month to boost the banking sector as well as the economy.
Finance companies and bond markets already fund acquisitions in India, while worldwide, this is an integral element of an evolved financial system that helps in better allocation of financial resources, Malhotra said. Allowing banks to do acquisition finance “will benefit the real economy” and give banks more business, he said.
The RBI draft on acquisition financing has guardrails like limiting bank funding to 70% of the deal value, caps on the debt-to-equity ratio, aggregate exposure limits relative to tier 1 capital of the bank, and eligibility criteria.
These, the governor said, “will ensure safety while allowing banks and their stakeholders to reap benefits of additional business.”
RBI issued the draft ECB framework against the backdrop of a strong external sector, Malhotra said. Net inflows to India through foreign investment, external commercial borrowings and (non-resident Indians) NRI deposits rose to $30.4 billion during April-July, compared with $26.8 billion in the same period last year, indicating growing international confidence in the country’s economy. According to the governor, RBI expects the net ECB and NRI deposit inflows into India to remain strong for the rest of the year.
“The calibration of the ECB framework, therefore, is a natural step in India's financial evolution, grounded in strong fundamentals, guided by prudence, and inspired by confidence in the economy's capacity to engage with global finance on its own terms,” the governor said.
The draft issued in October proposes to increase the limit for external commercial borrowings while also linking it to the borrower’s net worth, remove the interest rate (all-in-cost) ceiling, expand eligible lenders and borrowers, provide flexibility to end uses, and ease certain maturity and repayment conditions.
The all-in-cost ceiling on ECB loans was removed to encourage competitive rates and promote prudent hedging behaviour, Malhotra said. “Expansion of the universe of eligible lenders will improve pricing efficiency. Linking the borrowing limits to the borrower's net worth under the automatic rate links ECB to the strength of the borrower, while enhancing ease of doing business,” he said.
On a specific borrower framework, the central bank governor said no other country has such rules, and the earlier guidelines were given at a time when banks were grappling with elevated levels of stress, which is no longer the case.
He also backed a proposal to allow banks to fund mergers and acquisitions, terming acquisition finance as an integral part of the banking industry that will also benefit the economy.
“I wish to clarify that ECB (external commercial borrowing) will be permitted only for FDI-compliant real estate projects and remain prohibited for speculative dealing or loans for land or property trading,” said Malhotra at the SBI Banking and Economic Conclave.
Under the existing ECB rule, such loans cannot be raised for real estate activities.
Relaxation in ECB regulation and allowing banks to finance M&As were among several measures proposed by RBI last month to boost the banking sector as well as the economy.
Finance companies and bond markets already fund acquisitions in India, while worldwide, this is an integral element of an evolved financial system that helps in better allocation of financial resources, Malhotra said. Allowing banks to do acquisition finance “will benefit the real economy” and give banks more business, he said.
The RBI draft on acquisition financing has guardrails like limiting bank funding to 70% of the deal value, caps on the debt-to-equity ratio, aggregate exposure limits relative to tier 1 capital of the bank, and eligibility criteria.
These, the governor said, “will ensure safety while allowing banks and their stakeholders to reap benefits of additional business.”
RBI issued the draft ECB framework against the backdrop of a strong external sector, Malhotra said. Net inflows to India through foreign investment, external commercial borrowings and (non-resident Indians) NRI deposits rose to $30.4 billion during April-July, compared with $26.8 billion in the same period last year, indicating growing international confidence in the country’s economy. According to the governor, RBI expects the net ECB and NRI deposit inflows into India to remain strong for the rest of the year.
“The calibration of the ECB framework, therefore, is a natural step in India's financial evolution, grounded in strong fundamentals, guided by prudence, and inspired by confidence in the economy's capacity to engage with global finance on its own terms,” the governor said.
The draft issued in October proposes to increase the limit for external commercial borrowings while also linking it to the borrower’s net worth, remove the interest rate (all-in-cost) ceiling, expand eligible lenders and borrowers, provide flexibility to end uses, and ease certain maturity and repayment conditions.
The all-in-cost ceiling on ECB loans was removed to encourage competitive rates and promote prudent hedging behaviour, Malhotra said. “Expansion of the universe of eligible lenders will improve pricing efficiency. Linking the borrowing limits to the borrower's net worth under the automatic rate links ECB to the strength of the borrower, while enhancing ease of doing business,” he said.
On a specific borrower framework, the central bank governor said no other country has such rules, and the earlier guidelines were given at a time when banks were grappling with elevated levels of stress, which is no longer the case.
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