RBI eases norms for external commercial borrowing

Why in news?

• In a bid to improve ease of doing business, the Reserve Bank of India has decided to liberalise external commercial borrowing (ECB) norms, allowing all companies that are eligible for receiving foreign direct investment, to raise funds through the ECB route.
• The new framework takes immediate effect.
• It has now been decided, in consultation with the Government of India, to rationalise the extant framework for ECB and Rupee denominated bonds to further improve the ease of doing business.

 3-year maturity

• 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.
• Earlier, the minimum average maturity period was five years. The ceiling for borrowing remains at $750 million.
• All eligible borrowers can now raise ECBs up to $750 million or equivalent per financial year under the automatic route replacing the existing sector-wise limits.
• 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.

External commercial borrowing 

• External commercial borrowing (ECBs) are loans in India made by non-resident lenders in foreign currency to Indian borrowers.
• They are used widely in India to facilitate access to foreign money by Indian corporations and PSUs (public sector undertakings).
• ECBs include commercial bank loans, buyers’ credit, suppliers’ credit, securitised instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.
• ECBs cannot be used for investment in stock market or speculation in real estate.
• The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.
• Most of these loans are provided by foreign commercial banks and other institutions. During the 2012, contribution of ECBs was between 20 to 35 percent of the total capital flows into India. Large number of Indian corporate and PSUs have used the ECBs as sources of investment.
• For infrastructure and greenfield projects, funding up to 50% (through ECB) is allowed.
• Recently Government of India allowed borrowings in Chinese currency yuan.Corporate sectors can mobilize USD 750 million via automatic route,whereas service sectors and NGO’s for microfinance can mobilize USD 200 million and 10 million respectively.
• Borrowers can use 25 per cent of the ECB to repay rupee debt and the remaining 75 per cent should be used for new projects.
• A borrower can not refinance its entire existing rupee loan through ECB.
• The money raised through ECB is cheaper given near-zero interest rates in the US and Europe, Indian companies can repay part of their existing expensive loans from that.

(General Economy)(Source: – THE HINDU)