RBI prohibits use of ECBs for repayment of rupee loans

The Reserve Bank of India (RBI) has prohibited the use external commercial borrowings for repayment of domestic rupee loans availed within the country.

In a notification issued today, RBI announced the partial withdrawal of the facility extended to manufacturing and infrastructure companies to repay their rupee loans by raising loans from Indian bank branches abroad, as the risk remained within the Indian banking system, according to an RBI statement.

The RBI also warned exporters against using bank guarantees, intended to facilitate execution of export contracts, for availing advances to repay their loans from Indian banks, which, it said, is a clear violation of its instructions.

Accordingly, RBI has advised banks, including overseas branches / subsidiaries of Indian banks, not to issue standby letters of credit, guarantees or letters of comfort on behalf of overseas joint venture, wholly-owned subsidiaries (WoS) or wholly-owned step-down subsidiaries (WoSDS) of Indian companies for the purpose of raising loans and advances of any kind from other entities except in connection with the ordinary course of overseas business.

It has also advised banks that while extending fund / non-fund-based credit facilities to overseas JV / WOS / WoSDS of Indian companies in connection with their business, either through branches in India or through branches/subsidiaries abroad, they should ensure effective monitoring of the end use of such facilities and its conformity with the business needs of such entities.

Indian companies in the manufacturing and infrastructure sector were allowed to avail of external commercial borrowings (ECBs) for repayment of rupee loans availed from domestic banking system and / or for fresh rupee capital expenditure, under the approval route, subject to satisfying certain conditions. However, if the ECB is availed from overseas branches/subsidiaries of Indian banks, the risk remains within the Indian banking system, RBI pointed out.

The withdrawal of the facility is part of the measures by RBI to return to normal conditions from the supporting steps it had unfurled last year when the Indian currency had dipped to levels around 70 a dollar.

The steps provided easy liquidity to Indian companies, including exporters to shelter them from the effect of the plunging rupee and revive confidence in the economy.

Following the RBI interventions between July and September, the currency has clawed back. The rupee is now trading at 60.76 to a dollar in tandem with the 10.8 per cent rise in the bellwether Sensex in the past two months.

The measure is also aimed at pre-empting any arbitrage prospects in case the rupee gets stronger, especially with prospects of a stable government at the centre after the elections.

It has also advised overseas branches of Indian banks not to extend financial guarantees to Indian companies ''for the purpose of raising loans/advances of any kind from other entities except in connection with the ordinary course of overseas business''.

RBI has also cited instances of some exporters from India misusing concessional finance raised from banks to repay their older loans instead of using those to plough into making fresh exports.

 ''This is a clear violation of our instructions … and banks are advised to desist from such practices.''