RBI Strictures on ECB Usage for Rupee Loan Repayment Refinancing Risk of Indian Corporates may worsen

Disallowing ECB for repaying rupee loan: The Reserve Bank of India (RBI), by means of circular A.P. (DIR Series) Circular No.134 dated June 25, 2012, had allowed companies in the manufacturing and infrastructure sectors to access external commercial borrowings (ECBs) to pay rupee loans taken for the purpose of capital expenditure. This applies to companies which consistently earn foreign currency with the overall ECB amount being capped at 50% of annual average export earnings for the past three years.
However, the regulator has disallowed the refinancing of rupee loans through ECBs in a circular dated 22 April, 2014 with the understanding that the risk remains within the Indian banking system. While the argument is appropriate, the risk related issue is in itself not a new development. It may be construed as a sharp change in policy direction from the RBI.
The June 25, 2012 circular came at a time when the rupee had depreciated sharply by around 10% over a three month period, while the annulment of that circular comes at a time when the rupee has strengthened significantly. While one may conjecture the macro drivers, if any at all, behind the timing of the policy announcement, this definitely brings corporates with refinancing risk back to the drawing board to re-evaluate their refinancing options.
Refinancing Risk Intensifies for Some: Ind-Ra had anticipated that the country’s top 100 borrowers would need to refinance INR1.9tn-INR2.1tn of debt during FY15 (Special Report: Refinancing Risk - Top 100 Corporate Borrowers). For the analysis the agency had classified the borrowers into five groups based on relative ease of refinancing, with market access as one of the parameters. However, this could become a challenge for at least some corporates given the RBI’s recent notification.
The corporates which will bear the maximum brunt are those that were classified under the categories -“elevated risk to refinance (ERR)” and “medium ease to refinance (MER)”.
Of the 21 companies in the ERR group 12 companies with debt exposure of INR1,595bn and refinancing requirement of INR305bn may be particularly impacted by the RBI notification. Moreover, these 12 corporates have insignificant export earnings and limited foreign operations. Additionally, 13 of the 21 companies in MER, with a bank loan exposure of INR749bn and refinancing requirement of INR227bn may not be able to access low cost ECB loans.
Thus an estimated 25 corporates with a cumulative refinancing requirement of INR532bn and overall bank debt of INR2,344bn may find it increasingly challenging to efficiently refinance their debt if their forex earnings do not improve significantly.
Some Still Eligible: The remaining 17 corporates in MER and ERR categories have substantial export earnings or robust foreign operations. On a consolidated basis they may have higher financial flexibility (within the MER and ERR categories) to address their refinancing issues as compared to their 25 remaining counterparts in the MER and ERR groups.
Of the Top 100 borrowers analysed, the 38 large corporates with bank loan exposure of INR5,108bn which were tagged under the “no refinancing risk” and “high ease to refinance” categories will only be marginally impacted.
Monitoring End Use a Challenge: In order to assist Indian corporates in their overseas business initiatives, the RBI by means of circulars issued during 2006-2007 allowed Indian banks to extend fund/non-fund-based credit facilities and issue guarantees to joint ventures /wholly owned subsidiaries of Indian companies subject to prudential norms.
However, the RBI has made an observation that such facilities have been used to avail foreign currency loans to repay rupee loans. While the RBI continues to allow such facilities for the ordinary course of business, it has placed the onus of effective monitoring of such funds with respect to their actual end-use on the banks themselves. The agency feels that given the complex holding structure of foreign subsidiaries (at least in some cases) and step down subsidiaries in addition to the inter subsidiary contractual agreements, monitoring the funds may prove to be a significant challenge for the banks.
The banks may respond by limiting such exposure significantly, which may add to the foreign currency funding problems of many of bona fide corporates. Exporters in particular may be impacted.
(Source: Manager - Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company.)