External Commercial Borrowings Current Affairs - 2019

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New Policy for Overseas Borrowings

The Reserve Bank has come out with a new policy for overseas borrowings. The RBI has rationalized the earlier policy in consultation with the Government of India.

Features of the New Overseas Borrowing Policy

The features of the new policy are:

  • The new policy allows all eligible borrowers to raise External Commercial Borrowings (ECB) up to $750 million or equivalent per financial year under the automatic route replacing the existing sector wise limits.
  • To liberalise the framework ECB and rupee-denominated bonds Tracks I and II under the existing framework are merged as ‘Foreign Currency denominated ECB’ and Track III and Rupee Denominated Bonds framework are combined as ‘Rupee Denominated ECB’ to replace the current four-tiered structure (Track I, II and III denotes amount and maturity of funds raised).
  • All-in cost ceiling per annum has been pegged at the benchmark rate plus 450 bps spread.
  • The minimum average maturity period (MAMP) has been kept at three years for all ECBs, irrespective of the amount of borrowing except the borrowers specifically permitted in the circular to borrow for a shorter period.
  • The list of eligible borrowers has been expanded to include all entities eligible to receive foreign direct investment (FDI).
  • The new policy allows port trusts, units in SEZ, SIDBI, EXIM Bank, registered entities engaged in micro-finance activities, registered societies/trusts/ cooperatives and non-government organisations to borrow.
  • Negative list for which the ECB proceeds cannot be utilised includes real estate activities, investment in the capital market, equity investment, working capital purposes except foreign equity holder, repayment of Rupee loans for except foreign equity holder.

The recent changes that have been brought out in the ECB policy are likely to help wider set of eligible borrowers i.e. corporates and other entities to avail ECBs to meet their capital needs with the Uniform Minimum Average Maturity Period requirements, uniform all-in-cost ceilings and small negative end-user list.

RBI liberalises norms governing external commercial borrowings for infrastructure creation

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.

Key Facts

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.

Background

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.