On July 30 2019, The Reserve Bank of India relaxed the end-use stipulations under ECB guidelines for corporates and NBFCs. It was a long pending demand by the industry to relax the end-use restrictions and allow ECBs for refinancing of rupee loans and funding working capital. This chorus had become louder when RBI made series of major relaxations on pricing, tenor etc in 2018-19 but left these two demands unheard.

However the catch is the very high stipulated minimum average maturity. For ECB for working capital purposes, RBI has stipulated a minimum 10 year tenor. For refinancing of rupee loans taken for capex, minimum tenor is 7 years but if the rupee loan was taken for any other purpose such as working capital, the stipulated minimum tenor if 10 years.

Lets take a quick look at the ECB inflows into the country under automatic route between Jan and June 2019 (Source: RBI Website)

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The data shows that majority of the inflows have come in the 3-7 year segment. Out of the approx. USD 4.3 bn of loans over 7 years, majority is from international capital markets or foreign equity holders. Within this, most of the flow of over 10 yrs is from foreign equity holders.

Given the paucity of external funds in the 10 yr+ segment and the fact that working capital financing is short term by nature, a 10 yr hurdle is going to make this option unviable for most companies. Only higher rated companies, particularly PSUs will be able to use this window. Pls note that Oil Marketing Companies (OMCs) were already allowed to raise ECBs for working capital.

As far as ECB for refinancing of rupee loans taken for capex is concerned, we have some hope that even mid-tier companies will be able to avail the benefit given the 7 yr maturity. While commercial banks are hesitant to lend for longer tenors, development financial institutions (DFIs) have natural appetite for 7-10 year tenor loans. Since there was very little capex happening, we only saw about a USD 1 bn worth of loans from this segment of lenders during the Jan-June 2019 period, more than half of which was to NBFCs, predominantly in the 3-5 year segment. With the option to avail ECB for refinancing of rupee loans, more corporates are likely to opt for this window. As DFIs have special interest in the renewal energy, this sector is likely to benefit the most.

Author:  Rajesh Bhura (Managing Partner Quantart Market Solutions)

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