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Reserve Bank relaxes ECB norms for corporates, NBFCs

In a notification issued Tuesday, the RBI has allowed eligible borrowers to raise ECBs with a maturity period of 10 years from recognised lenders, except foreign branches and overseas subsidiaries of Indian banks.

By: ENS Economic Bureau | Mumbai |
Updated: July 31, 2019 3:18:44 am
Reserve Bank of India, RBI, external commercial borrowings, corporate loans, NBFC, NBFC sector, NBFC crisis, indian express The Budget 2019-20, announced on July 5, proposed to partially guarantee high-quality pooled assets of NBFCs and the RBI opened an indirect liquidity window for the sector to aid banks to give funds to the sector.

The Reserve Bank of India (RBI) has decided to relax the end-use restrictions relating to external commercial borrowings (ECB) for working capital requirements, general corporate purposes and repayment of rupee loans in a move aimed at providing access to cheaper and longer term funds for the corporate sector, especially liquidity-starved non-banking finance companies (NBFCs).

In a notification issued Tuesday, the RBI has allowed eligible borrowers to raise ECBs with a maturity period of 10 years from recognised lenders, except foreign branches and overseas subsidiaries of Indian banks.

Earlier, in its order dated March 26, 2019, the RBI had said ECB proceeds cannot be utilised for working capital purposes, general corporate purposes and repayment of rupee loans except when the ECB is availed from foreign equity holder for a minimum average maturity period of 5 years. Further, on-lending for these activities out of ECB proceeds was also prohibited.

The RBI said ECBs with a minimum average maturity period of 10 years for working capital purposes and general corporate purposes will be allowed. “Borrowing for on-lending by non-banking financial companies for the 10 year maturity and end-uses is also permitted,” the central bank said.

RBI also allowed ECBs with a minimum average maturity period of 7 years for repayment of rupee loans availed domestically for capital expenditure. “The borrowings for on-lending by NBFCs for the repayment of rupee loans would also be permitted,” it said.
“For repayment of rupee loans availed domestically for purposes other than capital expenditure and for on-lending by NBFCs for the same, the minimum average maturity period of the ECB would have to be 10 years,” the RBI said.

Explained

Relief for entities struggling to raise funds domestically

The RBI move to relax ECB norms will help corporates and NBFCs in accessing cheaper overseas funds at a time when many entities are struggling to raise capital in the domestic market. The central bank has allowed ECBs with a minimum average maturity period of 10 years for working capital purposes and general corporate purposes. It has also permitted borrowing for on-lending by struggling non-banking financial companies for the 10 year maturity.

Analysts said the RBI move will help corporates and NBFCs to access cheaper overseas funds at a time when many entities were struggling to raise capital in the domestic market.

RBI has also decided to permit eligible corporate borrowers to avail ECB for repayment of rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector and classified as SMA-2 (special mention accounts -2) or NPA, under any one-time settlement arrangement with lenders.

ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses and maximum all-in-cost ceiling.

Defaults by IL&FS which has a debt of around Rs 94,000 crore had affected the entire financial sector this year. Several NBFCs have been struggling to raise funds. Liquidity woes led to payment delays by housing mortgage firm DHFL. Besides, the economy in general has been facing a slowdown with many corporates coming under margin squeeze.

Led by NBFCs and housing finance companies, the financial services sector was the largest overseas borrower in April-May period of the current financial year in the wake of tight liquidity conditions in the domestic market. Indian corporates raised $6.7 billion in loans overseas (including via approval and automatic routes) in the first two months of FY20. Of the total borrowing, the share of financial sector stood at $3 billion or 45 per cent of the total ECBs, according to RBI data.

RBI Governor Shaktikanta Das had recently indicated that the central bank is planning a “fresh look” at the regulatory and supervisory framework of the shadow banking sector.

The Budget 2019-20, announced on July 5, proposed to partially guarantee high-quality pooled assets of NBFCs and the RBI opened an indirect liquidity window for the sector to aid banks to give funds to the sector.

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