Fairer financial weather leads RBI to amend ECB policy

The Reserve Bank of India (RBI) has made significant amendments to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, which govern policies relating to external commercial borrowings (ECB).

The changes, which were announced in a circular on 9 December 2009, have been introduced in light of improving conditions in the financial sector – in particular, the establishment of a progressive credit market. They are expected to help further firm up the monetary policy environment.

All-in-cost ceiling limit

Under the ECB policy as it was before the amendments were introduced, the RBI had withdrawn the cap that previously applied on the all-in cost of loans under the approval route. The all-in cost of a loan is defined in the regulations to include the rate of interest, other fees and foreign currency expenses (while excluding the commitment fee, pre-payment fee and fees payable in Indian rupees). This relaxation allowed Indian corporations to keep borrowing money during the global economic crisis and the consequent liquidity drought on overseas markets.

Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.