RBI bars firms from raising ECBs for working capital

Reserve Bank of India (RBI) is likely to restrict the corporates taking the external commercial borrowing (ECB) route for working capital loans.

A few corporates got their ECB proposals for raising working capital cleared by RBI during January-February. This was on account of the fact that the term of these loans was three years and beyond.

According to banking sources, even though RBI has not barred working capital loans explicitly, the nod has been for term loans.

Some of the coporates, taking advantage of the lack of clarity on the guidelines, applied for working capital loans. By keeping the term of such loans for three years and above, these corporates have made their applications eligible for ECB.

Now, the RBI is expected to issue a fresh clarification barring working capital loans through the ECB route. By disallowing working capital loans through ECB, the RBI will reiterate its earlier stance that offshore loans could be applied only for capital requirements.

In addition, bankers also expect the RBI to issue a clarification regarding the end-user norms for the usage of ECB loans.

They expect the RBI to notify a period of 90-120 days for raising the proceeds abroad and remiting it into India for expenditure.

As per the existing RBI guidelines, a corporate is required to park its proceeds abroad and remit it only when expenditure requirement arises in India.

However, lack of any time-frame has led to the interpretation that the disbursal of the loan by the bank was to be done in a day's time, which is not feasible. Usually a bank's disbursal of the ECB loan is done in tranches and is spread over a period of three to six months.

As per the data released by the RBI on proposals approved under the automatic route in February, 10 proposals envisaged raising ECBs for working capital for periods ranging from three years to above 10 years.