Context:
The Reserve Bank of India (RBI) has announced that it will soon release a draft framework to simplify and rationalise rules governing External Commercial Borrowings (ECBs). The new framework aims to expand the scope of eligible borrowers and recognised lenders, relax borrowing and maturity limits, remove cost restrictions, and simplify reporting procedures to enhance ease of doing business and promote capital inflows.
About External Commercial Borrowings (ECBs)
External Commercial Borrowings (ECBs) are commercial loans raised by eligible Indian entities from recognised non-resident entities in foreign currency or Indian Rupees (INR).
They are governed under the Foreign Exchange Management Act (FEMA), 1999, and related RBI regulations.
Organisations Involved
- Reserve Bank of India (RBI): Regulates and issues guidelines for ECBs.
- Borrowers: Indian corporates, Public Sector Undertakings (PSUs), Non-Banking Financial Companies (NBFCs), trusts, and institutions.
- Lenders: International banks, multilateral financial institutions, export credit agencies, foreign equity holders, and other recognised entities.
Aim of ECBs
- To provide Indian entities access to foreign capital at competitive interest rates.
- To diversify funding sources beyond domestic markets.
- To facilitate financing of infrastructure, capacity expansion, and other long-term projects.
Key Features of External Commercial Borrowings
Routes of Borrowing
- Automatic Route: Borrowing permitted directly if it meets standard conditions; processed through Authorised Dealer (AD) Category-I banks.
- Approval Route: Borrowing proposals that do not meet automatic route conditions require specific RBI approval.
Basic Conditions
- Minimum Maturity Period: ECBs must have a defined tenure (e.g., 3–5 years or more depending on end-use).
- All-in-Cost Ceiling: A cap on total borrowing costs, including interest, fees, and other charges.
- End-Use Restrictions: Rules defining permitted and prohibited uses of ECB funds.
- Mandatory Reporting: Borrowers must obtain a Loan Registration Number (LRN) and report transactions via Form ECB to the RBI.
Permitted Uses
- Financing capital expenditure, infrastructure, or expansion projects.
- Refinancing existing loans or replacing costlier debt.
Prohibited Uses
- Real estate business (except affordable housing and township projects).
- Investment in capital markets or speculative purposes.
- Working capital or general corporate purposes (unless specifically allowed).
