Trends & Outlook in ECBs D. R. Dogra CARE RATINGS

ECBs: Trends and issues 3 rd Feb, 2015 Contents Trends in ECBMarket FactorsConcernsWay Forward

ECBs: Trends and issues 3 rd Feb, 2015 External Commercial Borrowings over the years

ECBs: Trends and issues 3 rd Feb, 2015 Outstanding ECBs

ECBs: Trends and issues 3 rd Feb, 2015 Purpose wise Breakup of ECB for 9MFY16 PurposeShare in total (%) Refinancing38.5 On Lending/Sub Lending12.9 Rupee Expenditure11.8 Import of Capital Goods10.7 Telecommunication5.0 New Projects4.7 General Corporate Purpose4.6 Modernization3.5 Miscellaneous2.8 Working Capital1.9 Power1.2 Ports1.0 Overseas Acquisition1.0 Urban Infrastructure0.1 Micro Finance0.1

ECBs: Trends and issues 3 rd Feb, 2015 ECB and Interest Rate

ECBs: Trends and issues 3 rd Feb, 2015 ECB and other Finance Avenues

ECBs: Trends and issues 3 rd Feb, 2015 Regulatory Framework The lenders and investors are divided into three tracks Minimum Average Maturity (MAM) Period – Track I (Eg: Companies in manufacturing, shipping, software, airlines etc) 3 years for ECB upto USD 50 million or its equivalent 5 years for ECB beyond USD 50 million or its equivalent – Track II ( Eg: Infrastructure companies, holding companies etc) 10 years irrespective of the amount – Track III ( Eg: NBFCs, MFIs, companies involved in R&D) Same as under Track I

ECBs: Trends and issues 3 rd Feb, 2015 Regulatory Framework All-in-Cost (AIC) – Track I For ECB with min average maturity period of 3 to 5 years basis points per annum over 6 month LIBOR or applicable bench mark for the respective currency. For ECB with average maturity period of more than 5 years – 450 basis points per annum over 6 month LIBOR or applicable bench mark for the respective currency – Track II The maximum spread over the bench mark will be 500 basis points per annum. Remaining conditions will be as given under Track I – Track III Cost linked with market conditions

ECBs: Trends and issues 3 rd Feb, 2015 Regulatory Framework Individual Limits – The individual limits of ECB that can be raised by eligible entities under the automatic route per financial year for all the three tracks are set out as under: Upto USD 750 million or equivalent for the companies in infrastructure and manufacturing sectors; Upto USD 200 million or equivalent for companies in software development sector; Upto USD 100 million or equivalent for entities engaged in micro finance activities; and Upto 50 million or equivalent for remaining entitie s.

ECBs: Trends and issues 3 rd Feb, 2015 Contents Trends in ECBMarket FactorsConcernsWay Forward

ECBs: Trends and issues 3 rd Feb, 2015 Differential Interest Rates

ECBs: Trends and issues 3 rd Feb, 2015 Perception on Exchange rate

ECBs: Trends and issues 3 rd Feb, 2015 Derivatives Market MonthsNo of Contracts for the month of Jan’16 February52,92,090 March4,82,166 April1,92,469 May80,933 June34,355 July26,176 August2,400 September2,338 October1,330

ECBs: Trends and issues 3 rd Feb, 2015 Company Specific Issues Small companies preference for banks Given the state of their balance sheets and governance levels, may not be able to access the market The country rating becomes important as it acts as one of the benchmarks for pricing in the market Company rating becomes important – Lower rated companies find it difficult to use this avenue Often a CDS written by a bank on such loans taken where the swap cost could be a deterrent

ECBs: Trends and issues 3 rd Feb, 2015 Contents Trends in ECBMarket FactorsConcernsWay Forward

ECBs: Trends and issues 3 rd Feb, 2015 Pressure on External Debt Increasing share of ECBs in the external debt

ECBs: Trends and issues 3 rd Feb, 2015 Corporate Concerns Access to the market Limits placed by the RBI – Ceiling on rates Un-hedged position – Stress on balance sheet – Repayment concerns

ECBs: Trends and issues 3 rd Feb, 2015 Contents Trends in ECBMarket FactorsConcernsWay Forward

ECBs: Trends and issues 3 rd Feb, 2015 Way Forward ECB important avenue for resources – Mismatch between demand and supply in the India – 1 trillion dollar investment needed in infrastructure and manufacturing – Banks have limitations in the form of NPAs – Limited institutions to look at other form of borrowing – FDI more sector specific Assuming a 1:1 ratio, borrowing through ECB can be up to $ 30 billion

ECBs: Trends and issues 3 rd Feb, 2015 Way Forward Need to build a buoyant derivatives market – Necessary to hedge in derivatives – Long term contracts ECB limits to be liberalized further in a graded manner with ceiling to be increased based on market conditions

ECBs: Trends and issues 3 rd Feb, 2015 Thank You