India’s infrastructure companies can look forward to borrowing cheaper funds from international financial markets to fund projects at home after the government on Monday announced a five-fold increase in their overseas borrowing limits.
The move is aimed at helping resource-starved infrastructure companies to raise funds for high-cost projects. It comes at a time when industry has been hemmed by a hardening interest rate regime amid efforts by the Reserve Bank of India to rein in inflation.
Overseas borrowings, often referred to as external commercial borrowing (ECB), are loans raised by companies from international markets, where interest rates are relatively lower, with a maturity of three years or more.
Under the new norms, infrastructure companies can borrow up to $500 million from overseas markets for spending in the
home country. The government also allowed these companies to contract future borrowing at rates that could go as much as 4.5 percentage higher than the London Interbank Offer Rate for loans with a tenure of more than seven years.
“It is a definitely a positive move, although the current overseas borrowing market is not so conducive. The rise in the limit would surely be beneficial in the medium to long term,” said DK Joshi, principal economist with credit rating firm Crisil.
In the last two years, there has been a major rise in ECBs largely because of growing gap between domestic and international interest rates. At end-March 2008, outstanding ECBs at $ 62 billion ( up from the previous year’s $41 billion) accounted for the highest share in total external debt at 28 per cent.
Earlier in the day economic affairs secretary Ashok Chawla said that the government plans to take steps to ensure adequate flow of funds for the infrastructure sector.