Indian Law Updates August 2019 Banking Practice

Reserve Bank of India circular on rationalization of end use provisions for External Commercial Borrowings (ECBs)

The Reserve Bank of India (RBI,) pursuant to a circular dated 30th July 2019 (‘Circular’), liberalized certain end uses for the proceeds of which External Commercial Borrowings.

Under the earlier ECB regime, proceeds of an ECB could not be applied for working capital purposes or to repay Rupee loans, unless obtained from an equity holder.

In a move which is intended to improve the liquidity in the market for corporate borrower, pursuant to the Circular the proceeds of an ECB may be used by:

  1. An eligible borrower for working capital and general corporate purposes is permitted, if the minimum average maturity of the loan is for 10 years.
  2. NBFCs for on-lending, if the minimum average maturity of the loan is for 10 years.
  3. An eligible borrower for repayment of rupee loans availed of for capital expenditure, if the minimum average maturity is for 10 years.
  4. An eligible borrower for repayment of rupee loans availed of for purposes other than capital expenditure, if the minimum average maturity is for 7 years.
  5. NBFCs for on-lending, for the above purposes and for the above minimum maturity.

For the first time Indian lenders will be able to assign loans provided to corporates for capital expenditure in the manufacturing and infrastructure sector and which have been classified as SMA-2 or NPAs to eligible lenders under the ECB regulations. Indian corporates are also allowed to obtain loans from eligible lenders under the ECB regulations to re-finance.This has the potential to significantly boost the securitisation market in India and provide some relief to banks in managing their stressed assets.