The Centre is planning to allow companies to raise foreign loans with maturities of less than three years as part of a comprehensive review of the guidelines for external commercial borrowing.

The review will also examine the interest rate band in which companies are allowed to raise loans abroad.

The current all-in cost ceilings for interest rate spreads for such loans are up to 450 basis points over the six-month Libor (London inter-bank offered rate).

Government sources connected with the exercise said the restriction on raising short-term loans and the floor on maturity were set in the 1990s and there was a need to change the yardsticks now.

However, they ruled out any change in restrictions on end-use, which prohibit raising such loans for investment in stock markets and in real estate, except for investment in developing townships.

They also said there was little possibility of raising the present cap for automatic approval from $50 million.

Under the prevalent ECB policy, for units other than those in special economic zones, a loan must be for a minimum average maturity of three years. The maturity goes up to five years for loans larger than $20 million.

The sources said the policy might relax this floor. The bar on short-term loans was necessary earlier, but with the rise in foreign exchange reserves and the sustained fall in the level of external debt, both the finance ministry and the Reserve Bank of India feel that the bar can be lowered.

Similarly, the current all-in cost ceilings for interest rate spreads -- which range between 300 basis points and 450 basis points in terms of the respective currency in which the loan is being raised -- have restricted the field for local companies.

With the drastic fall in the interest rates globally, the restriction leaves little scope for foreign lenders to factor in several risks. This is especially true of loans for financial restructuring.

The issue was discussed in the quarterly review meeting of a high-level committee on ECBs. The review was also prompted by the demand from corporates to widen their access abroad.

Corporates can borrow funds abroad at Libor-linked rates of as low as 4-5 per cent compared with 12-13 per cent in India.

The officials said a final decision would definitely be taken within this fiscal. They said a comprehensive review of the ECB policy was one of the priority areas of reform for the finance ministry.

Improving external indicators

• Forex reserves have crossed $90 billion.
• World Bank has classified India as a less indebted country.
• Redemption of $4.23 billion Resurgent India Bonds has not dented reserves significantly.
• Moody's Investor Service has put the country's foreign currency debt on review for upgrade to Investment grade.