What changed
SIDBI is now included as an eligible borrower for ECB specifically for on-lending to the MSME sector. The automatic route applies for ECB up to 50% of owned funds, while amounts beyond that require RBI approval, subject to a USD 500 million per financial year ceiling. On-lending in INR requires full hedging of foreign currency risk, while foreign currency on-lending is only allowed to beneficiaries with natural hedge through foreign exchange earnings.
What it means for you
This move provides SIDBI with a cheaper foreign currency funding source to support MSME lending, potentially lowering on-lending rates for small businesses. Banks acting as AD Category-I must facilitate these transactions and ensure compliance with hedging and end-use conditions. The USD 500 million cap per year limits the total ECB flow through this channel, so lenders should monitor SIDBI's drawdowns.
What you must do
- Update internal ECB policy to include SIDBI as an eligible borrower for MSME on-lending.
- Verify that SIDBI's ECB availed under automatic route does not exceed 50% of its owned funds.
- Ensure SIDBI provides full hedging documentation for INR on-lending and natural hedge proof for FCY on-lending.
- Monitor the USD 500 million annual ceiling for SIDBI's ECB under this circular.
- Advise MSME clients about potential cheaper funding via SIDBI's on-lending.
Who it affects
SIDBI, AD Category-I banks, MSME borrowers, ECB lenders to SIDBI
What is the maximum ECB amount SIDBI can raise under automatic route?
SIDBI can raise ECB up to 50% of its owned funds under automatic route, with an overall ceiling of USD 500 million per financial year.
Can SIDBI on-lend ECB proceeds in foreign currency to MSMEs?
Yes, but only to MSMEs that have a natural hedge through foreign exchange earnings, and it must comply with FEMA Regulation 5(5).
What hedging is required if SIDBI on-lends in INR?
SIDBI must fully hedge the foreign currency risk when on-lending ECB proceeds in INR to MSMEs.