RBI's easing of ECB norms to benefit small, mid-sized firms: HSBC India

In yet another progressive step, the Reserve Bank of India (RBI) has allowed foreign banks with representative offices in the country to extend loans in rupees to domestic companies.

Foreign banks can now raise external commercial borrowings (ECB) in foreign currency, swap it with rupee funds with an Indian bank and offer rupee-denominated loans to Indian companies, according to the RBI.

There are close to four dozen foreign banks from 22 countries operating as representative offices with no physical presence in India. This additional source of money would benefit the corporate sector and also bring in competition.

In fact, many foreign banks-especially Japanese, Chinese and German lenders-are present in India through representative offices to support companies from their home countries in India.

For instance, many Japanese companies have bought equity or signed joint ventures with mid-sized Indian companies in the past five to six years. Chinese companies are also exploring similar opportunities in India. Tarun Balram, Head (Capital Financing), HSBC India, says small and mid-sized companies will surely benefit from the RBI move. "Large companies typically have access to both foreign currency and rupee resources directly or from banks," adds Balram.

The RBI move won't benefit large foreign banks with branches in India such as Citibank, Standard Chartered and HSBC India as they already have access to rupee resources by way of deposits. Will they lend at a lower interest rate? Rupee lending is currently linked to  banks' base rate, which is between nine and 10 per cent. The lending rate is upwards of 10 per cent depending upon the creditworthiness of the borrower.

The estimated swap cost for these foreign banks will be seven to eight per cent. If they bring in their own funds as ECBs, they can offer competitive lending rates. A treasury head at a bank says the latest move will also bring much-needed foreign exchange to the country.