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Indian Economy

RBI Eases External Commercial Borrowing Framework

  • 17 Jan 2019
  • 5 min read

The Reserve Bank of India has drawn up a new external commercial borrowing (ECB) framework in order to further improve the ease of doing business in India.

  • The new framework will come into effect immediately.

External Commercial Borrowings

  • External Commercial Borrowings is a loan availed by an Indian entity from a nonresident lender with a minimum average maturity.
  • Most of these loans are provided by foreign commercial banks buyers’ credit, suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc.
  • Advantages of ECBs:
    • ECBs provide opportunity to borrow large volume of funds.
    • The funds are available for relatively long term.
    • Interest rate are also lower compared to domestic funds.
    • ECBs are in the form of foreign currencies. Hence, they enable the corporate to have foreign currency to meet the import of machineries etc.
    • Corporate can raise ECBs from internationally recognized sources such as banks, export credit agencies, international capital markets etc.

New Framework

  • The RBI kept the borrowing limit under the automatic route unchanged at $750 million per financial year but replaced the sector-wise limits.
  • RBI has expanded the definition of beneficiaries eligible for external commercial borrowings to include all entities that can receive foreign direct investment. Among those now eligible are: port trusts, units in special economic zones, microlenders, not-for-profit companies, registered societies/trusts/cooperatives and non-government organisations.
  • The Export-Import Bank (EXIM) and the Small Industries Development Bank of India (SIDBI) has been allowed to borrow overseas from recognised lenders.
  • The previous four-tier structure has been replaced by two specific channels: dollar- and rupee-denominated ECBs.
    • Earlier, there was a distinction between foreign currency ECBs based on maturity. One was maturity period of three to five years and the other of 10 years. Both have been subsumed into foreign currency-denominated ECBs.
    • Indian rupee-denominated overseas borrowings with similar sets of maturities have also been combined into a single rupee- denominated ECBs.
  • To curb volatility in the forex market arising out of dollar demand for crude oil purchases, the framework provides a special dispensation to public sector oil marketing companies.
    • It allows them to raise ECB, with an overall ceiling of $10 billion, for working capital purposes with a minimum average maturity period (MAMP) of three years under the automatic route without mandatory hedging and individual limit requirements.
  • The RBI has decided to keep the minimum average maturity period at 3 years for all ECBs, irrespective of the amount of borrowing, except for borrowers specifically permitted to borrow for a shorter period, like manufacturing companies.
    • Earlier, the minimum average maturity period was five years.
    • Further, if the ECB is raised from a foreign equity holder and utilised for working capital, general corporate purposes or repayment of rupee loans, the maturity period will be five years.
  • Any entity who is a resident of a country which is financial action task force compliant, will be treated as a recognised lender.
    • This change increases lending options and allows various new lenders in ECB space while strengthening the anti money laundering/combating the financing of terrorism framework.
  • The negative list, for which the ECB proceeds cannot be utilised, would include real estate activities, investment in capital market, equity investment, working capital purposes ( except from foreign equity holder), repayment of Rupee loans (except from foreign equity holder).
  • Earlier in November, 2018 RBI also eased Hedging Norms for External Commercial Borrowings to make the ECB route attractive to firms.
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