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New RBI norms to make FY17 costlier for large firms

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Large borrowers in corporate India should be ready for higher interest rates on their incremental borrowing from April 2017, as the Reserve Bank of India (RBI) plans to raise the provisioning requirement in this regard.
In 2015-16, India’s top non-financial companies paid an average interest of 7.6 per cent on their borrowing. This could potentially rise to 8.7 per cent, based on average current yields on listed rupee-denominated corporate bonds (see table).
RBI has proposed that banks set aside higher provision for new lending to companies defined as ‘large’. Covered are those with fund-based sanctions from the total banking system of Rs 25,000 crore at any time during 2017-18; Rs 15,000 crore at any time during 2018-19 and Rs 10,000 crore at any time from April 1, 2019 on.
At the end of the past financial year, 21 non-financial companies in the BSE 500 had bank borrowing of Rs 10,000 crore or more, of which eight owed more than Rs 25,000 crore to banks. These eight would have to look beyond banks to raise new loans in 2017-18.
The analysis is based on the debt and total interest cost of 377 companies, excluding financial ones, that are part of the BSE 500 index. Debt is the average of year-end figures for FY15 and FY16, while interest is the actual amount for FY16.
As yields on corporate bonds are typically higher than companies’ FY16 interest cost, the proposed RBI norms are likely to push corporate India’s finance cost higher.
“While this is laudable in terms of development of the corporate bond market, we see it creating problems for some corporates in raising funds, especially for infrastructure projects,” wrote Soumya Kanti Ghosh, chief economic advisor, State Bank of India. He expects annual inflow of  Rs 40,300 crore in long-term debt markets and Rs 19,400 crore in commercial paper for FY18.
Some of the large companies likely to be affected by the change in regulations are Jaiprakash Associates, Vedanta, Hindalco, Tata Steel, Videocon Industries, Larsen & Toubro, Vedanta and GMR Infra.
Business Standard New Delhi,01th September 2016

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