On 27th September 2011, the central bank of India, the Reserve Bank of India (the “RBI”) issued a circular allowing Indian infrastructure companies to avail themselves of External Commercial Borrowings (“ECB”) denominated in Renminbi (“RMB”). This represents commercial opportunities for Chinese banks given the great demand in India for ECB and the rapid development of bilateral trade between China and India.
The introduction of ECB in RMB
The BRICS signed a framework pact in April 2011, agreeing to encourage lending and trade settlements in local currencies between them. On 27th September 2011, the RBI issued the A.P. (DIR Series) Circular No. 30 to modify its guidelines on ECB. Indian infrastructure companies can now borrow from overseas lenders in RMB. Before, Indian companies could not borrow in RMB unless the RBI permits in exceptional cases.
Under the modified guidelines, the ECB denominated in RMB are available on the following terms:
click here to see table
Potential of ECB in RMB
There are several reasons why ECB in RMB were introduced and why it will be welcomed by Indian companies. One is the cheaper cost of borrowing. The RBI has raised the repo rate 12 times in the past 18 months. As of October 2011, the repo rate in India stands at 8.25%, a record high since the fourth quarter of 2008; the base rates offered by public banks range from 10.00% to 10.75%. On the contrary, the benchmark lending rate prescribed by the People’s Bank of China is 6.65%; a RMB-denominated bond issued in Hong Kong earlier this year had an interest rate as low as 1.4%.
RMB-denominated ECBs can fill an existing facility gap in the Indian market. Over US$17 billion of ECB has been raised in the first half of 2011, signifying a great demand for funds. However, tightening of monetary policy in India, the shrinking US dollar liquidity and the European debt crisis have reduced Indian corporations’ financing options. In particular, longer tenor loans are needed in India’s booming infrastructure industry. Due to an asset-liability mismatch, not many onshore lenders can provide such loans.
In addition, borrowing in RMB can reduce the exchange risk for both Chinese and Indian parties in trade financing. Trade settlements between the two countries have been mostly conducted in US dollars, exposing both parties to exchange rate volatility. There has been a huge demand among Indian companies for RMB loans to reduce this risk.
The way ahead
Chinese banks can take this opportunity to develop their Indian business, given the great demand from Indian companies, especially those in the telecom and power industries. The annual cap of US$1 billion is modest, but the RBI has made it clear that the cap will be subject to review.
Meanwhile, Indian companies’ demand for goods and services will only increase in the near future given the growth of India’s infrastructure industry and the bilateral trade between the two nations. For instance, the Indian government is planning to add 75,000 to 100,000 MW power generation capacity during 2012 - 2017. Chinese exports to India, the majority of which are telecom and power equipment, amounted to US$40.8 billion in 2010. Bilateral trade between the two countries amounted to US$61.7 billion in 2010; the target of bilateral trade for 2015 is US$100 billion.
However, similar to the RMB business in Hong Kong, the loan market may initially be less active than the bond market, due to the current lack of a benchmark rate. We note that there is a working group being led by the APLMA to agree a benchmark RMB interbank rate satisfactory to the majority of the participants in the international syndicated loan market. Moreover, since RMB will very likely appreciate against Rupee, Chinese banks and Indian companies will take into account the rate of Rupee depreciation when deciding the interest rate of borrowing.