The euphoria created over the recent relaxations in the ECB norms seems to be misplaced. Although corporates can now raise cheap funds from the ECB markets, the million rupee question is how many of them will be able to mobilise funds? Only companies with high credit-worthiness and impressive track record to their credit will be able to tap the ECB route.

The average cost of funds works out to around 9-10 per cent (2-3 per cent over and above LIBOR). Adding the cost of merchant banking or syndication and bank guarantee as collateral security, total cost of funds comes to around 11-12 per cent without accounting for exchange rate fluctuation. The annual cost of borrowings comes closer to 18 per cent with an assumed cost of rupee devaluation of 10 per cent. The average cost of funds at 18 per cent should be viewed against a lower interest rate regime unleashed by slack season credit policy of RBI. Another important aspect of the guideline is the concept of `average maturity'. The guidelines lay down that the average maturity of the loan must be at least seven years for large commercial borrowings, i.e., above $15 million and three years for loans upto $15 million.

A debt can be retired by bullet repayment, equal installment payment and ascending or descending repayment in a specified period. For instance, the repayment of a loan of Rs 100 crore with a maturity of five years can be structured in the following the way: Shot payment of entire principal of Rs 100 crore in the fifth year; an equal installment of Rs 20 crore every year or Rs 10 crore every half year or even Rs 5 crore every quarter and repayment of principal in the ascending form with the advancement of maturity period.

If average is the middle point of a population then linkage of average with maturity of debt suggests the point of time when the outstanding debt reduces to half of its principle value. If the outstanding debt at the end of two years in a five-year debt reaches half, the average maturity should be two years. However, in practice, the number of installments is aggregated and the repayment amount is arrived at by dividing the total debt by the number of installments.

The method results in varying outcomes in case of different modes of structuring the repayments under the above three methods. Let's say a company strikes a deal to repay an ECB of Rs 80 million with a maturity of 8 years in 16 semi-annual equal installments of Rs 50 lakh each. In this case, the repayment can be structured in annual, semi-annual, quarterly or monthly basis.

However, for no obvious reason, the average maturity in case of semi-annual installments is worked out through a further division by two, i.e., dividing 8 by 2 on account of semi-annual installments and hence, the average maturity here is four years. While the outstanding debt remains unchanged at the end of every year, the period of average maturity varies with the structuring of repayments. This goes against the mathematical logic of uniform outcome in different repayment structurings. The ECB relaxations are a welcome move, but not a case of rejoice for all and sundry. Also, the guidelines should be made more clear in terms of the methodology of computation of average maturity.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.