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The Reserve Bank of India (RBI) has barred companies from repaying domestic loans through funds raised through external commercial borrowings (ECBs) from foreign branches of Indian banks.
RBI told banks to put restrictions on their foreign branches in terms of giving guarantees to offshore joint ventures/subsidiaries of Indian companies to avail of foreign currency loans to repay rupee credit.
The central bank said it had observed banks were extending non-fund-based credit facilities such as guarantees/stand-by letters of credit on behalf of foreign joint ventures and subsidiaries (of Indian companies) for purposes not connected to their businesses.
RBI clarified Indian banks could continue offering such facilities to joint ventures and wholly-owned subsidiaries of Indian companies for the ordinary course of foreign business. It said banks should ensure effective monitoring of the end-use of such facilities and that this was in conformity with business needs.
Indian companies in the manufacturing and infrastructure sectors were allowed to use ECBs to repay rupee loans for fresh rupee capital expenditure from domestic banks.
RBI said authorised dealer banks were allowed to issue guarantees for debt or other liability incurred on account of exports from India. This was intended to facilitate export contracts alone.
