Here I am addressing the frequent question which usually arises at the time of calculating interest rates for INR denominated External Commercial Borrowings (ECBs) and for loan under Section 186 of the Companies Act, 2013.
‘Benchmark rate’ in case of Rupee denominated ECB/TC is defined as the prevailing yield of the Government of India securities of corresponding maturity. Further, section 186 of the Companies Act, 2013 provides that no loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year government security closest to the tenor of the loan.
In order to get the answer to our main question – “what is prevailing yield of government securities”, we need to understand what is “Government Security (G-Sec)”.
A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
The Reserve Bank of India publishes “Ratio & Rates” chart on weekly basis which contains the weekly rates of Treasury Bill Yield and G-Sec Par Yield. Treasury Bill Yield Rates are given with a maturity rate upto 1 year and G-Sec Yield Rates are given for maturity rate of 10 years.
Yield rates can be calculated using this chart at the time of availing ECB or giving of loan under section 186 as per the tenure of the loan.
Government yield rates are weekly published by RBI and it can currently be accessed through below link:
https://rbi.org.in/Scripts/BS_NSDPDisplay.aspx?param=4&Id=25027
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