ECBs NBFC Experience. A presentation by Mr. Raman Aggarwal

Transcription

1 ECBs NBFC Experience A presentation by Mr. Raman Aggarwal Chairman, Finance Industry Development Council (FIDC) & Sr. V P SREI Equipment Finance Ltd. raman.aggarwal@srei.com

2 Revised ECB guidelines for NBFC RBI s came up with a revised framework for External Commercial Borrowing (ECB) policy dated 30th November 2015 The revised framework proposes a 3-Track segregation of the framework based on various criteria like Minimum Average Maturity (MAM) period of funds, eligibility of borrowers and lenders, permitted end-use of funds and all-in-cost interest rate requirement NBFCs can use ECB proceeds for: On-lending to the infrastructure sector; providing hypothecated loans to domestic entities for acquisition of capital goods/equipment; and providing capital goods/equipment to domestic entities by way of lease and hire-purchases NBFCs-MFI can raise ECB only for on-lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building. NBFCs have been included under Track 3 by virtue of which they are now eligible to raise only INR-denominated ECB with MAM of 3 years or 5 years 2

3 Revised ECB guidelines for NBFC contd.. Despite fewer restriction on end use, the revised ECB guidelines can still stifle NBFCs' resource mobilization ability Henceforth NBFCs will not be allowed to raise Foreign Currency denominated ECB which was allowed as per erstwhile ECB guidelines Earlier, while accessing foreign currency denominated ECB, the currency risk was borne by NBFCs. Now, with the changed conditionality, the foreign exchange risk would have to be borne by the lender Although the all-in-cost interest rate has been allowed to be in line with market conditions, it would still be a challenging task to mobilise long-term funds for the NBFCs Suggestion NBFCs should be allowed to raise ECB in foreign currency as well under Track 1 & 2 especially NBFC- AFCs under Track 1 and NBFC-IFCs under Track 2 so that the currency risk is borne by the NBFCs and not by the lenders 3

4 SREI S EXPERIENCE IN THE INTERNATIONAL BOND MARKET Euro Medium-Term Notes (EMTN) Intended primarily for securities offerings outside the United States Unsecured Notes, subordinated or unsubordinated Maturity cycle from 1 month up to 10 years or more RBI ECB guidelines stipulated All-in-Cost Ceilings as 6 month LIBOR plus 500 bps Issued on a fixed, floating coupon basis, zero coupon, hybrid securities etc. Notes issued under this program may be rated or unrated Multiple bond issues can be executed off the same MTN Program 4

5 Benefits of Establishing an MTN Program Maximum frequency Issue size (drawdown amount can be as small as USD5m equivalent) Tenor (from 1 month up to 10 years or more) Structure (can issue fixed rate, floating rate, zero coupon, hybrid securities etc.) Multiple bond issues can be executed off the same MTN Program including private placements / reverse enquiries Shortened Execution Time Given that a set of master documents will be created, speed to access market is achieved This facilitates taking advantage of favourable market conditions as and when they arise Reduced Cost Future legal fees will be less with the completion of the master document as documents are pre-agreed Scarcity value driven by small issue amounts will reduce cost of borrowing Shortened transaction execution time will facilitate tapping the market at favourable times, thereby reducing the average cost of funding over time Diversity Funding Based Ability to access regional bond markets through placements of local currency or USD bonds thus tapping a diverse investor base Deals can be done on a reverse enquiry basis. In this case, the investor will communicate the terms of the investment it is seeking to an issuer of MTNs through investment banks. If the issuer finds the terms of the reverse inquiry acceptable, it may agree to the transaction Private placement transactions can be done even with the single investor 5

6 End Use Restrictions As per the Old Policy Funds raised through ECB could be used only for importing equipment used in infrastructure projects. ECB for indigenously manufactured equipment was not allowed. This was restrictive as majority of the equipment were sourced locally and not imported Funding allowed only for a minimum average maturity (MAM) of 5 years and above As per the earlier guidelines, the only permitted mode of ECB finance was leasing. Other forms like hire purchase, loans against hypothecation were not allowed Earlier, eligible NBFC-MFIs, NBFCs-IFC and NBFC-AFC could avail ECB only for specific stipulated purpose 6

7 RUPEEE DENOMINATED BONDS The proposed offering is INR denominated fixed rate bonds settled in foreign currency like USD, EUR, SGD etc. distributed to international institutional investors Rupee Denominated Bonds The investors assume both credit and exchange rate risk in this product as exchange rate is fixed on every coupon payment date based on pre agreed formula The documentation for the proposed offering is governed by international law like English law or New York Law and follows distribution format like Reg S only or 144A / Reg S The bonds are settled through Euroclear, Clearstream or DTC 7

8 ROAD AHEAD Initially the High Rated Bonds, particularly Govt. guaranteed bonds will find interest in the international community as against Private Sector Bonds The state of the Indian economy will be the key to the future growth of the market for these Bonds. The interest in these Bonds today is driven by the faith in the India Story These bonds operate under the ECB guidelines which limit the amount a firm can borrow externally. There should ideally be no limits as there is no exchange risk The restrictions on the tenure of the Bonds should be removed if the market for Rupee Denominated Bonds has to be encouraged Banks incorporated in India are barred from issuing such bonds. This will limit market for these bonds More clarity on the tax treatment on these bonds is required, especially the withholding tax for investors Impact on domestic interest rates will be visible only once the overseas market for these Bonds grows 8

9 Thank You!