BQ: RBI Eases Norms On ‘End-Use’ Of Funds Raised Through External Borrowings

30 July 2019: The Reserve Bank of India, on Tuesday, eased guidelines around the end-use of funds raised through external commercial borrowings, giving corporations and non-bank lenders greater leeway in using overseas borrowings.

The easing of rules comes at a time when the domestic banking system remains cautious on lending, particularly to sectors which have thrown up a high proportion of bad loans. A section of non-bank lenders, too, are struggling to raise funds from banks and the bond markets.

To beat the funding constraints, the RBI has allowed ECBs to be used for working capital and general corporate purposes. It also allowed repayment of rupee loans using ECBs, including in cases where an account is stressed or has turned non-performing.

“Based on the feedback from stakeholders and with a view to further liberalise the ECB framework, it has been decided, in consultation with the Government of India, to relax the end-use restrictions,” the RBI said in a circular on Tuesday.

The move will enable Indian corporates to avail of offshore funds and ensure repayment of domestic lenders, Leena Chacko, partner at Cyril Amarchand Mangaldas, said, adding that the ECB regulations have been considerably liberalised. “Corporates can avail of ECBs for repayment of rupee loans which have been classified as NPA or SMA-2 for one-time settlement arrangement with the lenders,” Chacko said. “Lender banks are also permitted to assign SMA-2 and NPA loans to ECB lenders. NBFCs can also avail ECB and on-lend for general corporate purposes and working capital requirements subject to the conditions specified in the regulations.”

According to Moin Ladha, partner at Khaitan & Co., this will improve access to capital for Indian companies and in some situation be advantageous both from a borrower and lender perspective.

As per the new rules:

ECBs with a minimum maturity of 10 years can be used for working capital and general corporate purposes.

In the case of NBFCs, ECBs of minimum 10-year maturity can be used for on-lending.

ECBs of minimum maturity of seven years can be used to repay rupee loans for capital expenditure.

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 is required to be 10 years.

Corporates can also avail ECBs for repayment of capital expenditure in manufacturing and infrastructure classified as SMA-2 or NPA under any one-time settlement with lenders. SMA-2 loans are those that are overdue by 60 days while loans overdue by more than 90 days are classified as NPAs.

Domestic banks can also sell loans to eligible ECB lenders, provided that provisions such as the ‘all-in-cost’ ceiling is not breached.

The Bloomberg Quint reported

Categories: General News, India Bankruptcy


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