Indian banks, which are facing poor credit off-take by India Inc, may face fresh competition from foreign lenders.
The Reserve Bank of India (RBI) on Wednesday allowed non-resident foreign banks to offer debt to local companies in Indian rupees.
Foreign lenders can extend external commercial borrowings (ECBs) in Indian currency, if they mobilises Indian rupees through swaps undertaken with authorised dealers in India.
Ashutosh Khajuria, president, Federal Bank, said, "This will be a competition for the domestic banks as the foreign banks will not be bound by the reserve requirements of cash reserve ratio (CRR) and Statutory Liquidity Requirement (SLR). So they may be able to lend at cheaper rates."
The central bank said in a release that ECB contract should comply with all other conditions applicable to the automatic and approval routes.
"The all-in-cost of such ECBs should be commensurate with prevailing market conditions. For the purpose of executing swaps for ECBs denominated in Indian rupee, the recognised ECB lender may set up a representative office in India following the prescribed laid down process," said the RBI.
"The fact that foreign banks can set up representative offices in India for the purpose of lending to Indian companies will encourage banks which want to set up base in India in future. If the swaps are cheap and we have a strong balance sheet to fund, foreign lenders will look at funding Indian companies," said a foreign banker who did not want to be quoted.
The ECB limit for more than five-year maturity through the automatic route is $750 million for individual companies. The end-use of ECB funds has already been widened by allowing 25% of the ECB proceeds to be utilised towards repayment of existing rupee debt.
Also, the ECB proceeds can now be utilised towards refinancing of buyer's and supplier's credit.
The central bank has been easing the ECB procedures so that companies are not choked for funds. RBI easing the refinancing procedure of ECBs where companies can repay any existing debt by raising fresh ECB at lower all-in-cost but subject to the condition that the outstanding maturity of the original loans is maintained.