RBI allows banks abroad to lend in Indian rupees
04 September 2014
The Reserve Bank of India (RBI) on Wednesday allowed non-resident foreign lenders to extend external commercial borrowings (ECBs) in Indian currency, by mobilising Indian rupees through swaps undertaken with authorised dealers in India.
''All recognised non-resident ECB lenders may extend loans in Indian rupees by mobilising Indian rupees through swaps undertaken with an authorised dealer Category I bank in India,'' RBI said.
At present, all eligible borrowers are allowed to raise ECB in Indian rupees only from their foreign equity holders as per the extant ECB guidelines.
In order to provide greater flexibility for structuring of external commercial borrowings (ECB) arrangements, the RBI has decided that recognised non-resident ECB lenders may extend loans in Indian rupees subject to the following conditions:
- The lender should mobilise Indian rupees through swaps undertaken with an authorised dealer category-1 bank in India;
- The ECB contract should comply with all other conditions applicable to the automatic and approval routes as the case may be and the all-in-cost of such ECBs should be commensurate with prevailing market conditions;
- For the purpose of executing swaps for ECBs denominated in Indian rupees, the recognised ECB lender, if it desires, may set up a representative office in India following the prescribed laid down process; and
- The hedging arrangement for ECBs denominated in Indian rupees extended by non-resident equity-holders would continue to be governed by the extant ECB provisions.
The move will increase competition from foreign lenders for Indian banks, which are already facing poor credit offtake.
Unlike domestic banks, foreign banks in India are not subject to RBI rules on reserve requirements of cash reserve ratio (CRR) and statutory liquidity requirement (SLR), which would enable them to raise funds at cheaper rates.
Now that foreign banks can set up representative offices in India for the purpose of lending to Indian companies, the cheap swaps would encourage them to increase presence in the Indian market.
The RBI has set ECB limit for more than five-year maturity through the automatic route at $750 million for individual companies. Besides, it has widened the end-use conditions for ECB funds by allowing 25 per cent of the proceeds to be utilised towards repayment of existing rupee debt.
Also, the ECB proceeds can now be utilised towards refinancing of buyer's and supplier's credit.