Over the last few years we have seen the public shunning investments with long term maturities. At the same time the push for developing India’s infrastructure has resulted in local banks sanctioning a large number of long term loans.
So, while the banks have significant liabilities on their hands, the capital funds that are available are in the form of short term deposits. This has led to an asset liability mismatch – a worrying development for the Reserve Bank of India (RBI) and government, as it as looks to beef up core sector lending, especially in the infrastructure sector.
To deal with this situation the RBI has now allowed take-out financing of rupee loans through external commercial borrowings (ECB). This arrangement permits the bank that finances the project to transfer its obligation or a part of its obligation to a financial institution on a pre-determined basis. More importantly, it leads to the creation of loans of long tenor as ECB lenders can provide loans with longer maturity, which is what the infrastructure sector needs.
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Karan Singh is a partner at Trilegal in Mumbai where Arjun Sinha is an associate. Trilegal is a full-service law firm that advises on corporate and commercial law in India. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 120 lawyers, some with experience at law firms in the US, the UK and Japan.