India just made it easier for businesses to borrow money overseas



  • All eligible businesses foreign direct investment can now raise funds from foreign creditors automatically.
  • More importantly, all sectoral limits have been removed, with an overall cap on foreign borrowing of $750 million on an annual basis for all companies.
  • This decision should alleviate an internal crisis liquidity crisis and support the rupee by attracting more foreign funds to Indian markets.

Following pressure from the central government, the Reserve Bank of India (RBI) further relaxed the standards governing the borrowing of foreign funds by domestic entities.

The move is expected to ease a domestic liquidity crunch and support the rupee by attracting more foreign funds to Indian markets. This, in turn, will allow businesses to support their expansion plans and also support GDP growth as the government enters election season.

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

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

The RBI also removed the original four-tier borrowing system, which categorizes bonds according to maturity, and split the system into two segments, one for rupee-denominated bonds and the other for bonds in all other currencies.

More importantly, all sectoral limits have been removed, with an overall cap on foreign borrowing of $750 million on an annual basis for all companies. In addition, the minimum duration of all instruments has been set at three years.

Quite simply, Indian commercial banks do not have the liquidity to stimulate credit growth to the corporate sector. Burdened by non-performing loans, their medium-term financial strength rests on a few major resolutions under the Insolvency and Bankruptcy Code.

In an interview with ET, Rashesh Shah, the former chairman of FICCI, said that India is expected to record credit growth of
at least 15% to support economic growth. Credit growth came at a
12.5% on an annual basis from September 2018.

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

Easier overseas borrowing standards will not allow Indian commercial banks to raise funds overseas to support their domestic lending operations, but they will also allow companies to take on their own debt from overseas investors. without having to turn to national banks.

The RBI has, however, decided to maintain some restrictions on the overseas borrowing scheme. Companies cannot take on debt abroad through this channel for the purpose of buying real estate, investing in domestic stock markets and repaying loans in rupees. Moreover, the ceiling of all external commercial loan continue to
at 6.5% of GDP .

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