Thursday, August 14, 2008

Why not let go ?

Why is the Government so much bent on micromanaging individual company financing decisions? Take ECB rate ceilings for one. They say for accessing foreign loans of 3-5 year tenor, the current interest rate cap is 200 bps over six-month LIBOR. For loans maturing beyond five years, the ceiling is 350 bps above LIBOR.

[Today 6 month LIBOR is 3.10 %. RBI wouldn't let Indian companies borrow at rates in excess of 3.1 + 2.00 =5.1% for loans of 3-5 year tenor. Contrast this with Indian bank PLR of 14-16%. Now which is beneficial to a borrower? Do the math.]

I have a client that is badly in need of funds to complete its commercial complex that is in its last leg. We have identified a willing lender in a foreign bank. But regulations stand in the way.
Now why would RBI strangle business plans? Well, I can understand the borrowing risks borne by individual companies do translate into an overall country risk. But this problem is already addressed by the overall annual cap on foreign commercial borrowings. Within the overall quota, the government must accommodate smaller companies, which may have to pay somewhat higher interest rates. Currently the bias clearly appears to be in favor of big corporate houses and, in fact, 30 per cent to 40 per cent of the foreign borrowing quota every year is cornered by three to four big industrial groups. The small- and medium-size companies suffer the most in an economic slowdown as they do not have the muscle of big businesses to withstand the pressures of business cycles. The Government by its diktat prevents them from borrowing at a higher cost, slamming the only way they can get lenders interested in them. In these times, policy must provide them succor rather than make things more difficult.

A company is best placed to assess its own risks. If a small company can manage its business efficiently even after borrowing a little dearer, so be it. Take the case of my client. Even if it borrows at 500 bps above 6m LIBOR, it would still be borrowing at just 8.1%, which is a good 600 bps below Indian bank PLR! But RBI says it's ok if you sink deep into high cost Indian debt, but says no to significantly cheaper foreign loans. Isn't this ridiculous? That too when we have a problem of surplus foreign currency reserves at about $300 billion at the last count! The industry is demanding this be relaxed in view of the general uptrend in interest rates globally. To the extent interest rates have moved up globally, it makes sense to relax the interest rate ceilings.

Will RBI relent? It will have to, soon. The Prime Minister’s EAC read the tea leaves and is confident of the ability of the financial sector, as also the maturity of the corporate sector to support the higher growth process. But for that to turn real, RBI should let loose all those strings.

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