RBI restricts banks from extending ECB for repaying domestic loans

The Reserve Bank of India (RBI) has barred companies from repaying rupee loans taken from the domestic banking system via funds raised through external commercial borrowings (ECBs) from foreign branches of Indian banks. It has done so by restricting non-fund based credit facilities-guarantees, stand-by letters of credit, letters of comfort, and so on, which up-till now were extended by banks to Indian companies’ overseas arms. The RBI has barred banks, including their overseas branches/subsidiaries, from issuing non-fund based credit facilities on behalf of overseas arms of local companies for the purpose of raising loans/advances of any kind from other entities except in connection with the ordinary course of overseas business. This development came right after RBI found that banks were extending non-fund based credit on behalf of Indian companies’ overseas arms for purposes which were not connected with their business and rather it was found that this credit was used to get foreign currency loans for repaying rupee loans. Besides, the central bank also has asked exporter-borrowers to desist from the practice of using export advances, received on the strength of guarantees issued by Indian banks, for repayment of loans taken from Indian banks. According to RBI, this practice is a clear violation of its instructions except in cases where banks have given approval under the Foreign Exchange Management Act.