The Reserve Bank of India (RBI) by press release dated 30th July, 2019 has revised the outline for External Commercial Borrowings on the basis of the feedback from the stakeholders and also in consultation with the Government of India. The RBI has decided to relax the end-use limitations with a purpose to ease the norms for NBFC’s and Corporate. External Commercial Borrowing (ECBs) is basically a loan in foreign currency that an Indian entity avails from a lender who is non-resident. Generally these loans are given by foreign commercial banks and other institutions. It is a loan that is availed from non-resident lenders and also with an average minimum maturity for 3 years. In this article, let us know the updated ECB Norm for NBFC.
Updated ECB Norms for NBFC
The framework of ECB norm in India is primarily governed by the Foreign Exchange Management Act, 1999 (FEMA). A variety of different provisions in reference to this type of borrowing are included in the Foreign Exchange Management Regulations, 2018 (Borrowing and Lending) that is framed under FEMA.
According to the framework, the eligible borrowers are
- all entities eligible to receive FDI;
- Port Trusts;
- Units in Special Economic Zones;
- Small Industries Development Bank of India;
- Export-Import Bank of India; and
- All such entities that are eligible to raise the ECB in a Convertible Foreign Currency
- Registered entities engaged in micro-finance activities, like the registered societies, cooperatives, registered not for profit companies, trusts, and non-governmental organizations (allowed only for Indian Rupee denominated ECB).
The RBI has now officially allowed raising ECB for the purposes as given below from the recognized lenders, but the exception shall include overseas subsidiaries or foreign branches of Indian banks which shall be subject to the leverage and limit requirements:-
General Corporate and Working Capital Purposes
- ECB can be raised by the eligible borrowers with an average minimum maturity period (“MAMP“) for 10 years for the purposes of the working capital and general corporate.
- ECB borrowings with MAMP shall be lent by the NBFCs for 10 years for general corporate purposes and working capital purposes.
Repayment of Rupee Loans that are Domestically Availed for Capital Expenditure
The ECB can be raised by the eligible borrowers with 7 years of MAMP for repaying the Rupee loans that is domestically availed for capital expenditure. Similarly, ECBs can be raised by NBFCs with a MAMP of 7 years for repaying the Rupee loans domestically availed for capital expenditure and for lending.
Nonetheless, for the repayment of domestically availed Rupee loans by the NBFCs or the eligible borrowers for all the purposes except the capital expenditure, the average minimum maturity period is mandated to be for 10 years.
Capital Expenditure in Manufacturing and Infrastructure Sector
The ECB can be raised by the eligible borrowers for repaying the Rupee loans that are domestically availed for the capital expenditure in the infrastructure and manufacturing sectors if such is classified as:
- A special mention account (where a loan or an advance and the interest payment and principal is overdue from 61-90 days) or
- A non-performing asset (an advance or a loan where the principal or the interest payment was overdue for a time period of 90 days) – under any one of the time settlement with lenders.
The Lender banks are allowed to sell loans to the lenders who are eligible except the overseas subsidiaries of Indian banks or foreign branches but it shall be subject to the stipulation that the eligible lender must act in accordance with the guidelines of ECB like those associated to MAMP and all in cost and also amongst other appropriate terms within the ECB framework.
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Need for New ECB Norms for NBFC Funding
Bank loans, funding, and mutual funds borrowings are the three most important sources of NBFC borrowings. During the crisis, the NBFC sector had to face a rough time in collecting funds from any of the above given three in the domestic market.
The new norms were much needed in the existing problem of Liquidity crunch in the NBFC sector. After the NBFC crisis surfaced, the banks considerably had stopped lending to NBFCs. This situation created a condition of panic for all the NBFC in the country.
According to the industry expert, the reason behind the trouble faced by the NBFC sector is not primarily due to its lending practices but because of the NBFCs borrowing patterns. NBFCs used to lend loans for a long period of 8 to 10 years and on the other hand NBFCs used to accept a borrowing in commercial papers or short term debt papers for a time period of 6 months to 3 years.
This is majorly in practice for the NBFCs that are dealing in property loan sector and real estate. Therefore, because of this ground in particular the NBFCs are much in the need for the updated ECB norm.
The Impact of ECB Norms for NBFC
While the NBFC’s were struggling to raise their funds from the domestic market, RBI came up with the notification of the updated ECB norm. This step is anticipated to give relief to such NBFC and corporate entities in raising the overseas funds. According to the new ECB norm by RBI, the minimum ECB maturity period now is for 10 years and it is for the purposes of general corporate and working capital purposes.
It is expected that the influx of NBFC funding through ECB route is to assist NBFC’s that are struggling to preserve a positive ratio for working capital. The function of these funds is to provide flexibility in the operation of business process.
The benefit of using ECB for bank loans repayment is expected to balance the default of rates in NBFCs. NBFCs are the major reason behind inflow of the funds for the MSME sector. Therefore, the constancy in the NBFC sector is imperative for the development of MSME.
Thus, funding through ECB norm in NBFCs will provide flexibility to its lending operations and will give financial stability to the NBFC sector and at the same time it shall make a cheaper source of NBFC funding.
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