Enhances all-in-costs ceiling for raising funds through ECBs

Amid falling value of the rupee, the Reserve Bank of India on Wednesday asked corporates to park funds raised through external commercial borrowings (ECBs) for domestic expenditure with local banks, a move that will increase the inflow of foreign currency.

“The proceeds of the ECB raised abroad for rupee expenditure in India... should be brought immediately for credit to rupee accounts with AD Category I banks,” the RBI said in a notification.

Such funds could be used for local sourcing of capital goods, on-lending to self-help groups or for micro credit and payment for spectrum allocation, among other purposes.

The modifications in the norms for ECBs were done after a review of the developments in the global financial markets and the current macro-economic conditions. The directives have been made effective from Wednesday, the RBI said.

It, however, said that ECBs meant for foreign currency expenditure can be retained abroad pending utilisation.

The central bank said “as hitherto, however, the rupee funds will not be permitted to be used for investment in capital markets, real estate or for inter-corporate lending.”

As the cost of credit is significantly less in overseas markets, Indian companies have borrowed close to $29 billion in foreign currencies, through ECBs and FCCBs, so far in 2011, as against $18 billion in 2010. Meanwhile, the RBI also enhanced the ‘all-in-costs ceiling', which include rate of interest, fees and expenses, for raising funds through ECBs. The ceiling with an average maturity period of ECBs between 3 and 5 years have been revised upwards to 350 basis points from 300 basis points. However, the rate remains same for those with average maturity of above 5 years.

More In: Economy | Business