The Reserve Bank of India has pulled up banks for gross violations of external commercial borrowings (ECB) norms by companies.
In a communication to banks, the RBI has said the regulatory ceiling on interest rates on funds borrowed overseas has been breached.
The central bank has found that in many cases, the interest rate charged on ECBs exceeded Libor (London inter-bank offered rate) by more than 200 basis points.
One basis point is one-hundredth of 1 per cent. Under the RBI guidelines, the all-inclusive cost of ECBs should not exceed Libor by more than 200 basis points. Libor is the international interest rate benchmark.
Indian companies raised about $12.5 billion of debt overseas, through foreign currency convertible bonds (FCCBs), bonds and syndicated loans.
The RBI has also objected to banks not issuing a loan registration number when they receive applications for syndicating loans overseas. Besides, companies tapping the ECB route have also been found to breach the norms on end-use of loans and not adhering to the loan maturity periods.
According to sources in the banking industry, the RBI is contemplating penal action against banks for these violations.
Even though compounding norms applicable under the Foreign Exchange Management Act (FEMA) to deal with foreign exchange violations existed for such cases, these had rarely been resorted to, sources added.
Henceforth, these might be used frequently if such violations continued, said a banker.
The RBI may also put the onus of monitoring the end use of ECB proceeds on the banks and not leave it to the borrowers.
Bankers said the central bank had advised the banks to direct their respective branches to conduct stringent due diligence while sanctioning ECB loans.
Earlier, the RBI had asked companies to open the loan books to confirm the end use of funds raised through the ECB route. It was felt that these companies might channel such funds into the equity market to earn high returns.
The ECB market is cooling as the interest rates in the global markets are firming up following a series of rate hikes by various central banks, particularly the US Federal Reserve.
With the six-month Libor ruling at 5.3 per cent and the six-month forward dollar commanding a premium of 1.10-15 per cent, the cost of funds borrowed overseas works out to be 7.5-8.5 per cent, taking into account the transaction costs and margins charged by the banks. This is not very cheap compared with domestic funds.