Corporates looking at taking bank guarantees to raise external commercial borrowings will be hit by the new ECB guidelines announced by the government. Banks will, however, benefit as they will see a rise in rupee borrowings.

As per the new guidelines, banks and FIs cannot give guarantees to corporates accessing the overseas market.

Corporates are looking to raise cheaper money overseas as they had contracted loans from local banks and institutions at higher rates. This would have helped lower the banks' funded exposure to corporates.

Taking advantage of the low interest rates, many public banks had in the last six-eight months raised one-year tier-II capital through ECBs.

Other banks, which had been planning to raise money through similar route, can now no longer raise money overseas.

According to Canara Bank chairman and managing, R V Shastri, the propensity of corporates to raise cheap overseas funds to prepay high cost domestic debt will be curbed.

The RBI's move, besides benefiting banks by way of increased credit offtake, will also help rein in the rupee, which has been appreciating against the dollar for about a year now.

The six-month London inter-bank offered rate (Libor) currently is at 127 basis point and AAA corporates can borrow overseas at a spread of 125 to 150 basis points.

However, if corporates go in for a five-year ECB, the cost will go up by another 425 basis points if it decides to hedge its exposures.

The total cost for a corporate in case it hedges for a five-year foreign loan will be between 6 per cent and 7 per cent.  However, in most cases corporates avoid hedging their exposure or hedge only a part of it.

"The government order will stop one of the avenues of funding for corporates. ECB is an important avenue if corporates have to widen their investor base. For the first time in seven years, corporates have been looking at raising money overseas to expand their capacities. The government has over-reacted taking into consideration that ECBs this year was only at $1.2 billion as against reserves of over $92 billion," said a senior banker.

The curbs imposed on ECBs makes it clear that the Reserve Bank of India does not want corporates to take exposure to foreign borrowings in light of the tightening in interest rates in developed countries like England and Australia.

This is especially after the central bank governor Y V Reddy stated that the rising interest rates will not have any impact on India.

"To ensure that there is no impact, the RBI has to put boundaries around our market," said Deloitte Touche executive director Ashvin Parekh. This is a practice followed in most developed nations.

With the restrictions on overseas borrowings, the benchmark borrowing rate (based on overseas borrowing rates) for top corporates will no longer be available, said bankers.

This will hence be favourable for credit offtake as banks will no longer be pressurised to reduce their lending rates.