RBI stops banks from extending ECBs for repaying rupee loans

The Reserve Bank of India on Tuesday disallowed overseas branches of domestic banks from extending external commercial borrowings (ECBs) to manufacturing and infrastructure companies for repaying rupee loans.

"If the ECB is availed from overseas branches or subsidiaries of Indian banks, the risk remains within the Indian banking system," the RBI said in a notification.

"It has, therefore, been decided that repayment of rupee loans availed of from domestic banking system through ECBs extended by overseas branches or subsidiaries of Indian banks will, henceforth, not be permitted," the central bank said.

Manufacturing and infrastructure firms had been allowed to avail of ECBs to repay rupee loans from the domestic banking system and for fresh rupee capital expenditure under the approval route.

Further, the RBI said banks and their overseas units should not issue credit guarantees for overseas subsidiaries of Indian companies seeking to raise loans from other entities, expect for business needs.

Banks, including their overseas branches or subsidiaries, should not extend such facilities on behalf of overseas joint ventures, wholly owned units and wholly owned step-down subsidiaries of Indian companies for raising loans and advances from other entities except in connection with the ordinary course of overseas business, the RBI said.

The RBI said that in certain cases, such facilities were used to avail of foreign currency loans for repayment of rupee loans.

The RBI also cautioned banks from issuing guarantees where exporter borrowers were using export advances for repayment of loans taken from banks.

"It has, however, come to our notice that some exporter borrowers are using export advances, received on the strength of guarantees issued by Indian banks, for repayment of loans availed of from 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," RBI said.

Banks are allowed to issue guarantees for debt, obligation or other liability incurred by an exporter on account of exports from India to facilitate only export contracts and not other purposes.