ECBs Current Affairs - 2019
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Reserve Bank of India (RBI) has liberalised norms governing external commercial borrowings (ECBs) for infrastructure creation. The provisions have been reviewed and decision has been taken in consultation with Central Government.
RBI has reduced minimum average maturity required for the ECBs in the infrastructure space raised by eligible borrowers to three years from earlier five years. Additionally, it also has reduced average maturity requirement for mandatory hedging to five years from earlier ten years.
The move comes amid concerns surrounding availability of funds following liquidity squeeze and the difficulties being faced by non-bank lenders, especially those facing asset liability issues due to heavy reliance on short-term funding for long-term assets. This, along with defaults by infra lender IL&FS, has hurt credit markets especially infrastructure financing sector. Central Government has been unequivocal in suggesting remedial measures which will address needs of the economy. It had suggested to include special window for NBFCs, but RBI is not undertaking measures. However, relaxations in ECB norms follow other moves by RBI, including earlier it permission to banks to use credit enhancement to help NBFCs raise medium to long-term funds.
The Reserve Bank of India (RBI) has further liberalised External Commercial Borrowings (ECB) Policy by including more sectors in the window in a bid to facilitate cheaper access of overseas funds to Indian companies.
RBI has stipulated uniform, all-in cost ceiling of 450 basis points (bps) over benchmark rate, which, in most cases, is six-month London Interbank Offered Rate (LIBOR). The benchmark rate for rupee-denominated bonds will be prevailing yield of government bonds of corresponding maturity.
RBI has decided to increase ECB Liability to Equity Ratio for ECB raised from direct foreign equity holder under automatic route to 7:1. This ratio will not be applicable if total of all ECBs raised by entity is up to $5 million or equivalent. Earlier, ratio exceeding 4:1 was required the RBI’s approval.
RBI also has allowed all housing finance companies regulated by National Housing Bank and Port Trusts to raise ECB under all tracks. Such entities shall have board-approved risk management policy and shall keep their ECB exposure hedged 100% at all times for ECBs raised under Track I.
RBI also has allowed companies engaged in business of maintenance, repair and overhaul and freight forwarding to raise ECBs denominated in rupee only. Funds raised through ECBs will be not allowed to be invested in real estate or for purchase of land except for affordable housing, construction and development of SEZ and industrial parks or integrated townships.
RBI also relaxed norms for foreign investment in bonds by withdrawing investment cap for investors from investing in government bonds with minimum residual maturity of three years.
External Commercial Borrowings (ECBs)
ECBs are commercial loans borrowed from foreign sources for financing the commercial activities in India. It may be bank loans, securitised instruments, buyers’ credit, suppliers’ credit, foreign currency convertible bonds, etc. It should be noted that ECBs are not FDI. In case of FDI, foreign money is used only to finance the equity Capital. But in case ECBs, foreign money is used to finance any kind of funding other than equity.