Two months after putting together a draft framework for rules on external commercial borrowings (ECBs), the Reserve Bank of India has issued a document overhauling the existing regulations.
The ramifications of the changes are slowly starting to sink in, with the impact expected to be especially hard for Indian state-owned banks. This is because NBFCs are now only eligible to raise rupee-denominated debt offshore but Indian lenders and their overseas subsidiaries have been barred from participating in offshore loans that fall under the rupee denominated debt category.
This is an obvious headache, not just for NBFCs that have outstanding foreign currency debt but also for Indian state-backed lenders, who typically take up large portions of offshore loans by names such as Power Finance Corp and Rural Electrification Corp. What makes the rules a lot harder to digest is the fact these are some of the most active borrowers in the market.
Non-bank Indian financial borrowers collectively raised $1bn in G3 currency last year. And this has jumped to $2.24bn year-to-date, according to Dealogic.
But while banks’ access to such names is now shut, the RBI is right to push ahead with the changes. The ban bodes well for the Indian banking system and the country’s syndicated loan market in the longer run.
For one, the rules will drive Indian banks to diversify their portfolios. They can channel funds to other companies that might have a more pressing need for money but got lost in the shadow of state-backed NBFC heavyweights. It will divert money from being parked in a handful of sovereign backed NBFC names to sectors critical to creating longer term wealth in the country such manufacturing and software.
This diversification in turn will also help the wider banking system. This is especially important as state-owned banks have until now been eagerly funding other government backed companies. This means money has simply been moving from one state-owned pocket into another.
India is not unique in this regard as China and many other Asian countries have a similar problem. But times have changed and RBI’s overhaul of lending regulations is a step in the right direction.
Admittedly, the shift will be tough as state-owned lenders slowly come to grips with the new regulations. But it’s about time lenders shook up their loans business, especially as they are also facing pressure from non-performing loans.
NBFC loans might be the bread and butter business of Indian banks but it’s time they found something else to feast on.