Master Direction - External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers (Updated as on November 22, 2018))
UR
- Applies toAll regulated entities
- StatusIn force
- IssuedMar 26, 2019
- Amendmentsnone tracked
- Length62 points in 4 sections · 6 min read
The four dates on this rule
- PublishedMar 26, 2019The day RBI put this document out. This is the same day as the Issued date on this rule.
- Starts to applyNot statedNot stated separately in this document. Read the rule itself before you assume a start date.
- Time to get readyNot statedCannot be worked out until the day it starts to apply is known.
- Last date to actNot statedNo date to act by was found in this document. Other dates may sit inside single paragraphs.
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49 of the 62 points name no product and bind every product. All products.
Numbers to remember
| five years | Track one is foreign currency debt with a minimum average maturity of three to five years. RBI Para 2 |
| one year | A manufacturing company may borrow for as little as one year on the foreign currency track. RBI Para 2 |
| ten years | Track two is foreign currency debt with a minimum average maturity of ten years. RBI Para 2 |
| three years | Up to fifty million dollars the minimum average maturity is three years. RBI Para 2 |
| two years | The overseas lender must have held a bank account there for at least two years. RBI Para 3 |
| two per cent | Penal interest for default may not exceed two per cent above the contracted rate. RBI Para 4 |
What it says
How firm is each point
Stated by RBI — RBI’s own paragraph says this. We have only made it plainer.
Our reading — BankPulse read RBI’s paragraph and shortened it. The paragraph is the authority, not this line.
Needs judgement — RBI leaves this to the bank to settle, so nobody can give you a fixed number here.
Must know
1. Track one
Track one is foreign currency debt with a minimum average maturity of three to five years.
2. Manufacturers may borrow shorter
A manufacturing company may borrow for as little as one year on the foreign currency track.
3. Track two
Track two is foreign currency debt with a minimum average maturity of ten years.
4. Fifty million is the line
Up to fifty million dollars the minimum average maturity is three years.
BankPulse example. A company raises foreign currency debt of USD 40 million. That is upto USD 50 million, so the minimum average maturity is 3 years. A second company raises USD 80 million. Being beyond USD 50 million, its minimum average maturity is 5 years.
5. Above that, five years
Beyond fifty million dollars the minimum average maturity becomes five years.
6. Convertible bonds need five
A convertible or exchangeable bond needs five years whatever the amount raised.
7. Microfinance needs three years
A microfinance borrower needs three years of good standing with an Indian bank.
8. A lender must be checked
The overseas lender must have held a bank account there for at least two years.
9. High-risk countries barred
An individual lender from a country outside the money laundering standards may not lend.
10. The cost ceiling
The all-in cost may not exceed 450 basis points a year over the benchmark rate.
11. Penal interest capped
Penal interest for default may not exceed two per cent above the contracted rate.
12. Land and property barred
The money may not buy land or real estate, except for affordable housing and named zones.
13. Capital market barred
The money may not be put into the capital market.
14. Equity investment barred
The money may not be used for equity investment.
15. One exception, tightly drawn
Those three bars lift only for an equity holder or group company loan of five years or more.
16. Working capital barred
On tracks one and three the money may not fund working capital.
17. General purposes barred
It may not fund general corporate purposes on those two tracks either.
18. Repaying rupee loans barred
It may not be used to repay a rupee loan on those two tracks.
19. Passing it on is barred
On every track the money may not be lent on to another for any barred purpose.
20. Seven times the equity
Debt owed to a foreign equity holder may not exceed seven times what he put in.
21. Rupee cannot become foreign
A rupee loan may not later be switched into a foreign currency.
22. Hedging must be complete
Certain borrowers must keep the exposure fully hedged at all times below five years.
23. The bank must verify it
The designated bank must check that full hedging holds and report it to the Reserve Bank.
24. What trade credit is
Trade credit is credit for imports into India, running up to five years.
25. One year for ordinary goods
For goods other than machinery the credit runs up to one year from shipment.
26. Five years for machinery
For capital goods the credit may run up to five years from shipment.
27. Trade credit cost ceiling
The all-in cost of trade credit may not exceed 350 basis points over the benchmark.
28. Three years for machinery
For capital goods the guarantee may run up to three years.
Do it
1. No criminal case pending
The certificate must also record that no criminal action is pending against the lender.
2. The guarantee follows the credit
The guarantee period must end when the credit period ends.
3. Monthly return
The bank must file its trade credit statement by the tenth of the next month.
Background
1. What all-in cost includes
It includes interest, fees, expenses, charges and guarantee fees in any currency.
2. What a foreign borrowing is
A foreign commercial borrowing is a loan an Indian entity raises from a recognised non-resident.
3. Every condition binds
The conditions apply together. Meeting one of them does not excuse another.
4. Three tracks
The framework runs on three tracks, set by the currency and by how long the loan runs.
5. Securitised instruments count
Floating rate notes, fixed rate bonds and certain preference shares are all forms of it.
6. What forms are allowed
Bank loans, securitised instruments, buyer and supplier credit, leases and two bond types.
7. Portfolio debentures are outside
Debentures bought in India by a registered foreign portfolio investor fall outside this framework.
8. Two routes
A borrowing goes either by the automatic route or by the approval route.
9. Banks clear the automatic route
On the automatic route the authorised dealer bank examines the case itself.
10. RBI clears the other
On the approval route the borrower applies to the Reserve Bank through his bank.
11. One form always needs approval
A foreign currency exchangeable bond may be issued only by the approval route.
12. Housing finance companies too
A housing finance company regulated by the National Housing Bank may also borrow.
13. Track three widens it
Every non-banking financial company under the Reserve Bank may borrow on track three.
14. Who may lend
International banks, capital markets, multilateral institutions and export credit agencies.
15. Indian bank branches abroad
An overseas branch of an Indian bank may lend only on track one.
16. Rupee track uses another benchmark
On the rupee track the spread runs over the yield on government securities of the same maturity.
17. Infrastructure limit
An infrastructure or manufacturing company may raise up to 750 million dollars a year.
18. Software limit
A software development company may raise up to 200 million dollars a year.
19. Microfinance limit
An entity in microfinance may raise up to 100 million dollars a year.
20. Everyone else
Every other eligible entity may raise up to 500 million dollars a year.
21. Above the limit needs approval
A proposal above those limits goes to the Reserve Bank for approval.
22. Small borrowings escape it
That ratio does not apply where all borrowings together are five million dollars or less.
23. Any convertible currency
The loan may be raised in any freely convertible currency or in rupees.
24. Supplier credit
Supplier credit is credit for an import given by the overseas supplier himself.
25. Buyer credit
Buyer credit is a loan the importer arranges from an overseas bank to pay for imports.
26. Twenty million is automatic
A bank may approve trade credit up to twenty million dollars per import transaction.
27. Above that, the Reserve Bank
Anything above that figure is considered by the Reserve Bank itself.
28. No rolling over
No roll-over or extension is allowed beyond the period permitted.
29. Precious metals excluded
Gold, palladium, platinum, rhodium and silver are outside that guarantee facility.
30. Bank borrowing limit
A bank may borrow abroad up to the whole of its unimpaired tier one capital.
31. Borrowing to fund exporters
A bank may borrow abroad to give an exporter customer pre-shipment or post-shipment credit.