Companies can't use ECBs from 'same' Bank to Repay Loans

The RBI has barred manufacturing and infrastructure companies from repaying rupee loans taken from domestic banks through the external commercial borrowing (ECB) route at their overseas branches/subsidiaries.

"If the ECB is availed from overseas branches/subsidiaries of Indian banks, the risk remains within the Indian banking system," the central bank said in a notification issued on Tuesday.
Indian companies in the manufacturing and infrastructure sector had been allowed to avail of ECBs for repayment of rupee loans from domestic banking system for fresh rupee capital expenditure under the approval route, subject to satisfying certain conditions. The RBI has also cautioned commercial banks against issuing standby letters of credit/guarantees/letter of comforts on behalf of overseas joint ventures or wholly-owned subsidiaries or wholly-owned step-down subsidiaries of Indian companies for the purpose unrelated to the ordinary course of overseas business.

Those credit instruments are different forms of non-fund based lending, generally extended by banks to corporates. "It has been observed that banks are extending non-fund based credit facilities like guarantees/stand-by letter of credits/letter of comforts and the like on behalf of JV/WOS/WoSDS for purposes that are not connected with their business, Rather, in certain cases, they used to avail of foreign currency loans for repayment of rupee loans," RBI said.

The central bank has also sought effective monitoring of the end use of funds extended to overseas arms of Indian companies in connection with their business. Moreover, the RBI has taken strong exception to cases where it noticed some exporters using export credit received on the strength of guarantees issued by Indian banks. "This is a clear violation of our instructions except in cases where banks have received approvals under FEMA and banks are advised to desist from such practices," the RBI said. 

Economic Times, New Delhi, 23-04-2014

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