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Thursday, 19 October 2017

Making it easier?

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Indian borrowers have hardly made their presence felt in the offshore loan markets in the past year and this is largely due to the slowdown in outbound M&A and the lack of liquidity in international credit markets. With no clear signs of the global financial crisis dissipating, loan bankers are hoping Indian regulators will relax rules governing offshore borrowings to help resuscitate sagging loan markets.

Since the onset of the global crisis, volumes in foreign currency loans have plummeted significantly from the halcyon days of 2006 and 2007. Indian companies then were at the forefront making transformational acquisitions, which eventually led to big-ticket M&A financings, particularly in the offshore loan markets.

But as the tide turned globally and liquidity dried up in international capital markets, one consequence has been a sharp fall in outbound M&A from India. In turn, financings have dried up and loan bankers focusing on this area have been left high and dry.

One transaction promises to revive the Indian loan market and it is no surprise offshore lenders are piling into the deal. A US$2bn–$2.5bn loan is likely to emerge from the merger of India’s Bharti Airtel with South Africa’s MTN Group giving loan bankers a chance to earn some decent fees.

Bankers are also looking for a ray of hope from an unlikely source of influence – the Reserve Bank of India (RBI). Offshore borrowings for Indian corporates have largely been dictated by the ebb and flow of guidelines from the RBI, which is tasked with regulating the capital flows into India.

With that as its main objective, the RBI constantly tweaks and tinkers with the external commercial borrowings (ECB) guidelines that govern foreign currency loans by Indian corporates.

Foreign lenders are praying that the RBI liberalises the ECB regime further to revive offshore lending by Indian corporates. After all, the RBI has played an instrumental role in increasing liquidity in the domestic debt markets, which have come to the rescue of Indian borrowers during the crisis when international capital markets remained largely shut.

Market participants are clamouring for similar measures that will open the door wider for more activity in the offshore loan markets. Borrowers and lenders alike have always felt that the impediments to offshore borrowings are restrictions, relating to use of proceeds, interest rate caps and average maturities.

To RBI’s credit it has done away with – albeit temporarily, until the end of the year – the interest rate caps that govern offshore borrowings. But loan bankers have more on their wish list – liberalising the use of proceeds and the average maturities.

As always, the biggest impediment is the restriction on use of proceeds from offshore loans. Proceeds from offshore borrowings can be used only for capex or infrastructure projects, refinancing of foreign currency debt or overseas acquisitions. Proceeds from borrowings of US$20m or above are permitted only for foreign currency expenditure of specified end-uses. The funds cannot be remitted to India. Offshore borrowings of up to US$50m for rupee expenditure are allowed subject to RBI approval.

Infrastructure sector borrowers enjoyed some exceptions as they were allowed US$100m for rupee expenditure subject to RBI approval. That limit was quintupled in September to US$500m in any financial year.

Market participants believe that RBI should ease the restrictions on this front and allow borrowers to be the best judge of whether they want to borrow offshore or not.

Likewise, the ECB regulations also restrict borrowers from tapping shorter than five-year tenors for loans above US$20m. Current rules prescribe borrowers to seek RBI approval if they intend to borrow above US$20m for a minimum average maturity of three years.

“The RBI officials need to wake up to reality. Where is the liquidity in the longer tenor?” questioned one banker in Singapore, alluding to the fact that the average maturity requirements under the ECB rules were not in sync with current market dynamics.

Indeed, foreign lenders have been very selective in providing funding to Indian credits and only the top-tier names have managed to squeeze anything out of the offshore loan markets. Those that get a favourable look-in are either government-linked companies or the bluest of blue chips.

Transactions with tenors longer than three years have been few and far between and some of the successful fundraisings have been with tenors of three years, which is currently the sweet spot in offshore loan markets as demonstrated by the slew of top-tier borrowers from Australia that have tapped offshore loan market liquidity.

With already two-thirds of the year behind them, loan bankers do not have much time left in the remainder of the year. But if the RBI adopts a more magnanimous stance when it reviews the ECB regulations in October, then 2010 could be a different story.

Prakash Chakravarti

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