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​​With the Indian economy trying to tap the external commercial borrowings for financial requirements as enunciated in the Union Budget, the Reserve Bank of India (RBI) has now opened up this route to the corporate borrowers too. Any company that owes money to a bank in India will now be permitted to borrow overseas and use the funds to pay and settle the outstanding with the Indian bank.

The Reserve Bank of India (RBI) on Tuesday allowed domestic banks to directly sell their bad loans in manufacturing and infrastructure sectors to investors abroad as part of one-time settlement (OTS) exercises. The move will allow overseas investors to take direct loan exposure to Indian corporates.

The defaulters, or stressed borrowers, can sell their assets in accordance with the OTS scheme, in order to raise external commercial borrowing (ECB) from abroad to repay domestic loans, the RBI said in a statement.

At the same time, Indian corporates can raise long-term loans for working capital, ‘general corporate purposes’ and repaying domestic rupee loans, the statement said.

Apart from easing the non-performing asset (NPA) pressure on domestic banks, the RBI’s move can allow companies to raise cheap, long-term loans easily now. Part or all of that can be used to retire domestic loans.

The RBI notification said corporate borrowers can avail of ECB “for repayment of rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector and classified as SMA-2 or NPA, under any one-time settlement arrangement with lenders”. SMA is special mention account, in which SMA-2 is the loan not serviced between 60 days and 90 days.

If the loan is not serviced on the 91st day, it becomes NPA.

“Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders, except foreign branches/overseas subsidiaries of Indian banks, provided, the resultant external commercial borrowing complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework,” the notification said.

This is an interesting solution the regulator has come up with and may prove to be a stone that can kill several birds. The first outcome will be the bank in India will receive its funds back even if it’s a one-time settlement where banks forgo a certain portion of the overdue interest to recover the dues. The borrower gets to raise funds at lower rates of interest since these loans are usually available at a few basis points above the London inter-bank offer rate or LIBOR. The circular issued by RBI in this regard limits this facility to only companies in the manufacturing and infrastructure sectors. Possibly, this is a calibrated decision since these two sectors will be able to use this relaxation to resume operations in their respective units /projects with the fresh infusion of funds. The other perspective could be to do with the employment potential these two sectors hold and the government could have nudged RBI into making this decision.

However, the most interesting part of this new scheme is that the lending banks too can sell off the loan assets, recover their dues and consider the amount raised, through the ECB route, as the one-time settlement on behalf of the borrowing company.

The move also permits any corporate entity even if its account with the bank does not qualify as an NPA or even an SMA-2 (Special Mention Accounts with outstanding not serviced for 60 to 90 days). It may also reduce the pressure on the NCLT under IBC (Insolvency & Bankruptcy Code), since companies may be able to raise funds to pay off the Indian debtors.

The hesitation on the part of the regulator in opening up this ECB facility to Indian companies has been due to lack of any control the RBI has on the source of such funds from overseas. Already the circular excludes any of the branches of the Indian banks from lending through this route. There are also other stipulations which form part of the ECB framework and those have to be complied with.

With the foreign exchange reserve in a comfortable position, the RBI is able to take this important decision to allow external commercial borrowings. 

The most interesting part of this new scheme is that the lending banks too can sell off the loan assets and recover their dues.


  1. Corporates can raise long-term ECB loans for working capital, general purpose, and to repay domestic loans
  2. Banks or corporates can sell bad loans directly to ECB lenders abroad
  3. Loans raised will be part of one-time settlement with companies
  4. Loans with minimum average maturity of 7-10 years can be raised to repay domestic loans


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