
A number of additional announcements, besides policy decisions and macroeconomic outlooks, made the October MPC review special, particularly for the financial services space. Two days later, the RBI released draft rules aimed at promoting operational ease and systemic simplification to enable companies to borrow funds in foreign-currency instruments. The central bank chose to do this instead of introducing a brand new borrowing facility.
Businesses were already allowed to raise funds in foreign currencies through different routes including foreign currency loans. The proposal changes three main things for corporate borrowers — aimed at ensuring that companies with strong financials get better access to foreign capital.
Here’s an overview of these draft norms and what exactly changes for firms raising money through foreign currency credit lines:
What are foreign currency loans?
Foreign currency loans, like external commercial borrowings (ECBs), have enabled Indian companies to borrow funds externally since the early 1990s, coinciding with the country’s economic liberalisation and market reform drives.
These loans enable companies to borrow from overseas banks in foreign currency for specific purposes, ranging from capex to debt refinancing to working capital requirements, under certain conditions.
Why the change?
The draft rules are primarily about three things:
- Easier eligibility criteria for establishing a place of business within the country
- Better operational freedom by shifting from prescriptive to a principle-based framework
- Simpler closure process for non-compliant and inactive branches or offices
The RBI has proposed broadening the pool of borrowers as well as lenders that can take part in ECBs, linking limits to the borrower’s financial strength. The borrower-and-lender base eligible for ECB transactions is set to be expanded to enhance opportunities of credit flow.
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Companies could borrow up to $1 billion or as much as 300 per cent of their net worth, whichever is higher, with easier end-use restrictions and minimum average maturity requirements. These loans will be available at market-determined interest rates, giving firms more flexibility in accessing foreign funds.
The central bank has invited comments on the draft norms by October 24. Users can share their feedback with the RBI through its website or by email with the subject line ‘Feedback on draft ECB framework’.
Here are answers to a few frequently asked questions (FAQs):
What exactly are foreign currency loans or ECBs?
Foreign currency loans enable Indian businesses to borrow money from overseas banks in foreign currency. These funds can be used for different purposes.
Why has the RBI proposed these new draft rules?
The RBI wants to simplify the current framework in its broader attempts at promoting the ease of doing business and supporing the country’s financial sector.
What are the key changes proposed in the new rules?
- Relaxed eligibility norms for companies operating in India
- More operational flexibility by moving away from overly prescriptive rules
- A simpler closure process for non-compliant or inactive branches/offices
How much money can companies borrow?
Under the proposed framework, they can raise up to $1 billion or 300 per cent of their net worth (whichever is higher) through foreign currency loans.
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