Entrance to the Reserve RBI’s Central Office on Shahid Bhagat Singh Road in Mumbai. (Photographer: Prashanth Vishwanathan/Bloomberg)

RBI Eases External Commercial Borrowing Framework

The central bank eased foreign borrowing norms allowing a wider set of end-users to tap overseas markets for loans.

It expanded the definition of beneficiaries eligible for external commercial borrowings to include all entities that can receive foreign direct investment, according to the Reserve Bank of India’s circular uploaded to its website. 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 and the Small Industries Development Bank of India has been allowed to borrow overseas from recognised lenders.

The RBI had indicated in its December monetary policy meeting that it could consider easing overseas borrowing rules. The new framework will come into effect immediately.

The previous four-tier structure has been replaced by two specific channels: dollar- and rupee-denominated ECBs.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 with a minimum average maturity period of three to five years and 10 years. Both these routes have been subsumed into foreign currency-denominated ECBs.

Indian rupee-denominated overseas borrowings with similar sets of maturities have been combined into a single rupee- denominated ECBs.

Other Changes

  • The RBI kept minimum average maturity period unchanged at three years for all ECBs, irrespective of the amount borrowed. But if a manufacturer raises overseas debt of up to $50 million in a financial year, the minimum average maturity period would be one year.
  • Any ECBs raised by the foreign equity holder (of a domestic company for example) which are utilised for specific purposes will have a minimum average maturity of five years.
  • The RBI kept the borrowing limit under the automatic route unchanged at $750 per financial year but replaced the sector-wise limits.
  • The all-in-cost ceiling has been retained at 450 basis points over Libor in case of foreign-currency borrowings, and “over the prevailing yield of the government of India securities of corresponding maturity”.

The common negative list of end-uses for which ECBs cannot be raised or utilised remains unchanged. An eligible borrower cannot raise ECBs for real-estate activities, capital market investments, equity investments, on-lending to entities, and even working capital or general corporate activities unless the funds are raised specifically by the foreign equity holders of the resident borrower.