ECB for affordable housing in India
Indian companies can access funds from abroad through External Commercial Borrowings (ECB) of different kinds. In general, ECB pertains to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (like floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) obtained from non-resident lenders with a minimum average maturity of 3 years.
ECBs are different from FDIs, though both access foreign investments. Foreign direct investment (FDI) refers to a direct investment into production or business in a country by a company in foreign country, either by buying a company in the target country or by expanding operations of an existing business in that country. It includes mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra-company loans.
Applicability of ECB
In the recent years, ECB has become very popular amongst the Indian realty companies, due to the limitations in the Indian debt market in the form of short maturity period and high rate of interest.
ECBs provide an additional source of funds to the companies as they let them to supplement domestically available resources. The borrowers are also benefitted by the lower rates of interest prevailing in the international financial markets. The money raised through ECB is cheaper given at near-zero interest rates in the US and Europe, Indian companies can repay their existing expensive loans from that. However, the borrowers can use only 25 percent of the ECB to repay rupee debt while the remaining 75 percent can be used for their new projects.
Benefits of ECBs also include -
i. Low cost involved in raising ECBs compared to that of domestic borrowings
ii. More flexibility offered by lenders in terms of providing security for ECBs and
iii. Global financial market being a huge source of credit, it is easy to avail funds
Where do firms get ECBs from?
ECB can be raised from international banks, international capital markets, multilateral financial institutions like IFC, ADB etc., export credit agencies, suppliers of equipments, foreign collaborators and equity holders.
To borrow ECB for infrastructure sector in India, one has to follow Automatic Route, which do not require any RBI/Government approval.
The real estate and infrastructure development companies in India can use the funds raised through ECBs either for developing affordable residential projects or for providing loans up to Rs 25 lakh to home buyers for buying units priced at Rs 30 lakh or less. Housing finance companies (HFCs) and National Housing Bank (NHB) can also borrow ECBs in order to aid prospective owners of low cost, affordable housing units.
Recent changes in ECBs by RBI
Recently, the Reserve Bank of India (RBI) has extended the external commercial borrowing (ECB) relaxation for affordable housing for two years which was merely one year earlier. Even the RBI has allowed real estate developers and housing finance companies to raise up to $1 billion through ECBs in the last fiscal in order to promote low-cost housing projects.
Impact of ECBs on real estate in India
Although, at present, the supply of low cost housing is low, the ECB window will definitely help developers raise resources at cheaper rates, which would help them build more low-cost housing projects, opines R.V. Verma, Chairman and Managing Director of NHB.
Along with funding at minimal interest rates, builders will get an alternative route to raise funds at a time when they are facing a liquidity crunch with little or no access to project finance through domestic sources. The all-in costs including hedge costs through this route works out to be less than 10 percent against the 13-15 percent prevailing in the open market and banks, said experts.
Developers’ response on ECBs
Foreign debt flows like ECBs have become a big source for getting easy funds, especially in the real estate sector of India. Moreover, as the prevailing interest rates are mostly high, ECBs are considered a cheaper source of funding by corporates. Many builders have been looking to take this route to come up with more affordable houses.
While some of the leading developers like Provident Housing, Mantri Realty, and Value and Budget Housing Corporation (VBHC) have already planned to tap this window, some other Mumbai-based realty biggies such as Godrej Properties, Oberoi Realty and Mahindra Lifespaces have decided not to apply as of now since they are not present in the low cost segment. Some other like Tata Housing have decided to just wait and watch the market for now.
VBHC is constructing 18,500 new flats in the affordable category in suburbs of Delhi, Chennai and Bangalore for which it is funding through ECBs. Mantri Realtyis looking to borrow ECB for its low cost housing project in Gwalior with total 1,200 flats of 60 square metres each priced at Rs 2,000 per sq ft. Provident is looking at ECBs to develop around 1.5 to 2 million sq ft in low-cost housing projects in Hyderabad and Vizag.
Currently, only these four developers have applied for raising $100 million ECBs. However, the NHB believes that more developers will follow ECB route after the extension of deadline. Private developers have enough time to mobilise resources which promises a better response this time.
In order to ensure proper usage of funds meant for affordable housing and plugging their diversion for buying land by developers, the NHB is planning to come up with a Management Information System (MIS) with monitoring and reporting mechanism to check the end use of the borrowed funds by developers.
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