Medium-term borrowers can limit hedging to 70 pc
MUMBAI: The Reserve Bank India (RBI) has relaxed the hedging requirement for the medium-term external currency borrowings (ECB) – three to five years, by Track 1 borrowers, from the existing 100 per cent mandatory hedging to 70 per cent.
This, according to forex experts, will bring down the cost of borrowings substantially with regard to foreign currency borrowings as the hedging cost has gone up considerably recently following the high volatility in rupee during the past couple of months.
The RBI circular noted, “On a further review of the extant provisions, it has been decided, in consultation with the Government of India, to reduce the mandatory hedge coverage from 100 per cent to 70 per cent for ECBs raised under Track I of the ECB framework by eligible borrowers for a maturity period between 3 and 5 years.”
The circular has clarified that the external currency borrowers (ECBs) who have raised funds prior to this circular will be required to mandatorily roll-over their existing hedge(s) only to the extent of 70 per cent of outstanding ECB exposure.
The borrowers that stand to benefit from the new relaxation include companies in manufacturing and software development sectors; shipping and airlines companies; Small Industries Development Bank of India (SIDBI); units in Special Economic Zones (SEZs); Export Import Bank of India (Exim Bank) (only under the approval route); companies in infrastructure sector, Non-Banking Financial Companies -Infrastructure Finance Companies (NBFC-IFCs); NBFCs-Asset Finance Companies (NBFC-AFCs); Holding Companies and Core Investment Companies (CICs); Housing Finance Companies regulated by the National Housing Bank, etc
In fact, due to the exchange risk and the consequent hedging requirement have prompted many top class corporates including housing finance companies to chase the masala bonds route to raise funds, though the price they have to pay is much higher compared with ECBs.