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RBI may clamp down on ECBs for real estate

RBI may clamp down on ECBs for real estate

Apnaloan.com Research Bureau

10 Aug 2007

The Reserve Bank of India (RBI) is seriously considering the option of clamping down on overseas financing for real estate in a bid to contain inflation.

The clampdown will be part of a package from the central bank to make end-use norms for external commercial borrowing (ECB) funds more stringent for various sectors.

Real estate prices have almost doubled in the past year, which has contributed to inflation. However, rising domestic interest rates have encouraged real estate companies to opt for ECBs. The difference in the rates offered by local banks and international lenders is as high as 3 to 4 per cent excluding the forward cover cost.

Banking sources said the government may also consider lowering the ceiling on raising of funds overseas under the automatic route.

Real estate companies have raised close to $802 million as ECBs in fiscal 2007, according to statistics put out by Bloomberg. Of this, almost $457 million was raised by two mega special economic zones, Reliance and Mundra Port and SEZ Ltd, which the RBI has classified as lending to the commercial real estate sector.

Overseas fund raising is currently allowed for only integrated township development on a minimum of 100 acres of land. A commerce ministry directive dated January 4, 2002, said the term real estate excludes development of integrated townships.

It includes housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges, mass rapid transit systems and manufacture of building materials.

The RBI is also going slow in clearing pending foreign investment proposals worth $10 billion in the real estate sector.

Realty sector analysts say curbing real estate companies from raising funds abroad will slow the industry's growth. "In a free market, a company should be allowed to raise funds from wherever it finds them cheap," said Kunal Bannerjee, vice-president of Ansal API Ltd.

Others disagree. "Inflation is certainly the priority number one and the RBI is on the right track," said D R Dogra, executive director of rating firm Care Ratings.

"The new norms would force these companies to look for cheaper options and give better end-use justifications to the RBI for raising funds," he added.

Dogra says the tough ECB guidelines would be eased once inflation is back to manageable levels. "These would be temporary measures. Once the RBI is comfortable with inflation, we can expect the ECB guidelines to ease," he added.

(Courtesy: Business Standard)