The RBI tweaked the external commercial borrowing (ECB) norms for the second time this year on Tuesday in order to further liberalise the framework. "It has been decided, in consultation with the Government of India, to relax the end-use restrictions relating to external commercial borrowings for working capital requirements, general corporate purposes and repayment of rupee loans," the apex bank said in a statement. The new norms make it more attractive and viable for corporates, including the currently struggling non-banking finance companies (NBFCs), to raise cheaper offshore funds.
Eligible borrowers will now be allowed to raise ECBs with a minimum average maturity period of 10 years for the above-mentioned purposes from recognised lenders, except foreign branches/overseas subsidiaries of Indian banks. Thus far, ECB raised from foreign equity holder and utilised for general corporate purpose/working capital/repayment of rupee loans boasted a minimum average maturity period of five years. "Borrowing for on-lending by NBFCs for the above maturity and end-uses is also permitted," the RBI added.
Several corporates and particularly NBFCs have been facing a severe liquidity shortage since the crisis at Infrastructure Leasing and Financial Services (IL&FS) last year. Worse, they have struggled to access credit from domestic sources over the past 10 months. "For many corporates and NBFCs getting adequate liquidity has become a problem even though there is a surge in systemic liquidity. This is because of the perception of credit risk. They are getting it [capital] but at a very high cost," Rupa Rege Nitsure, chief economist at L&T Financial Services, told Reuters.
Borrowers will be also allowed to raise ECBs with a minimum average maturity period of seven years for repayment of rupee loans availed domestically for capital expenditure. "The borrowings for on-lending by NBFCs for the repayment of rupee loans would also be permitted," the statement added. For repayment of rupee loans raised domestically for purposes other than capital expenditure and for on-lending by NBFCs for the same, the minimum average maturity period of the ECB needs to be 10 years.
Lastly, the RBI will now allow eligible corporate borrowers to also tap the ECB route for "repayment of rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector and classified as SMA-2 or NPA, under any one-time settlement arrangement with lenders". Under the RBI's Prudential Framework for Resolution of Stressed Assets, which came into effect in June, lenders have to recognise incipient stress in loan accounts immediately on default and classify them as Special Mention Accounts (SMA). SMA-2 is the most critical category where principal or interest payment is overdue for 61-90 days.
"Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders," the RBI said, adding that such a move would, however, need to comply with all other norms of the broad ECB framework. According to analysts, with the drop in global crude oil prices, a relatively stable currency and sharply lower interest rates in developed economies, it is a good time to open the ECB route for domestic borrowers. Previously in February, in a bid to facilitate the resolution process under insolvency law, the RBI had proposed to permit bidders to raise funds through ECB for repaying existing lenders.
With Reuters inputs
(Edited by Sushmita Choudhury Agarwal)