The Reserve Bank of India (RBI) has recently presented a new framework for external commercial borrowings (ECBs), aiming to ameliorate the business environment in India. This modified configuration begins immediately, providing an extensive array of advantages to Indian businesses and opening up new opportunities for overseas lenders.
Understanding External Commercial Borrowings
ECBs stand as loans obtained by Indian entities from a non-resident lender, with a prerequisite of maintaining minimum average maturity. The majority of ECBs are furnished by offshore commercial banks in numerous forms such as buyers’ credit, suppliers’ credit, securitized instruments including Floating Rate Notes and Fixed Rate Bonds.
Benefits of External Commercial Borrowings
Several compelling reasons make ECBs attractive to corporations. The primary advantage is the ability to borrow large volumes of funds, which are available for relatively long terms. As ECBs are foreign currency-based, they assist companies in procuring foreign currency crucial for importing machinery and related equipment. Furthermore, the interest rates on ECBs are typically lower than domestic funds. Additionally, firms can raise ECBs from internationally acclaimed sources including banks, export credit agencies, and international capital markets.
A Look at the New Framework
Despite maintaining the borrowing limit at $750 million per financial year under the automatic route, the RBI has replaced the sector-wise limits, expanding the definition of eligible beneficiaries. The beneficiaries now include port trusts, SEZ units, microlenders, not-for-profit organizations, registered societies, trusts, cooperatives, non-government organizations, the EXIM bank, and SINDBI. These entities can now borrow overseas from recognized lenders.
The RBI has simplified the earlier four-tier structure into two specific channels – dollar-denominated and rupee-denominated ECBs.
Revised Maturity Periods
The RBI has standardized the minimum average maturity period across all ECBs to be 3 years, with exceptions for borrowers such as manufacturing companies allowed to borrow for shorter periods.
Special Provisions for Public Sector Oil Marketing Companies
The new framework includes special provisions for public sector oil marketing companies, permitting them to raise ECBs up to $10 billion for working capital requirements, aiming to control forex market volatility due to crude oil purchases.
Key Facts About New ECB Framework
| ECB Type | Minimum Average Maturity Period | Borrowing Limit |
|---|---|---|
| Dollar denominated ECB | 3 Years | $750 million per financial year |
| Rupee denominated ECB | 3 Years | $750 million per financial year |
| ECBs for Public Sector Oil Marketing Companies | 3 Years | $10 billion |
Eligibility Criteria for Lenders and Restriction on Utilization of ECB Proceeds
An essential part of the new ECB framework requires that any resident entity from a country compliant with the financial action task force operates as a recognised lender. This guideline not only increases lending options but also fortifies the anti-money laundering/combating the financing of terrorism framework.
The framework restricts the utilization of the proceeds from ECBs in specific areas, particularly real estate activities, investment in the capital market, equity investment, and repayment of Rupee loans, except when raised from a foreign equity holder for working capital or general corporate purposes.
