RBI restricts companies from refinancing of rupee loans via External Commercial Borrowings (ECB) route

RBI has barred Indian companies from raising money from subsidiaries of Indian banks overseas via the External Commercial Borrowings (ECBs) to refinance their rupee loans. Thus, Indian companies will not be allowed to raise ECB from overseas branches or subsidiaries of Indian banks for the purpose of refinance/repayment of the rupee loans raised from the domestic banking system.
In April 2014, the RBI also restrained the banks from issuing guarantees to offshore joint ventures and subsidiaries of Indian companies to avail foreign currency loans to repay rupee credit.
Earlier, Indian companies in manufacturing, infrastructure and hotel industries were permitted to raise a maximum of $10 billion from this route. The maximum permissible ECB that could be availed of by an individual company was 75% of the average annual export earnings realized during the past 3 financial years.
Typically, an Indian company’s overseas subsidiary approaches an Indian bank for a guarantee or letter of credit to use it for availing loans from another bank there. Banks were permitted to issue non-fund based credit to overseas subsidiaries of Indian companies up to 20% of unimpaired capital of the bank.
The step by RBI has come close on the heels of warning the banks against issuing letter of credit and guarantees to Indian companies’ overseas subsidiaries. It said that such non-fund based credit was being used for purposes other than the business the company is involved.

The restrictions are applicable in cases like take-out financing, infrastructure financing and spectrum allocation and other repayments. The direction were issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999).

The ECB loans are much cheaper than the domestic loans and therefore companies use the arbitrage available to their benefit. 

Month: Current Affairs - May, 2014