RBI stipulations for refinancing exposures under prudential norms

In terms of instructions contained in RBI circular DBOD.No.BP.BC.107/21.04.048/2013-14 dated April 22, 2014 and A.P. (DIR Series) Circular No.129 dated May 9, 2014, Indian companies are not permitted to raise external commercial borrowings (ECB) from overseas branches / subsidiaries of Indian banks for the purpose of refinance / repayment of the rupee loans raised from the domestic banking system. The above  circular states that it is irregular to utilize  export advances  which are received on the strength  of bank guarantee provided by Indian Banks where prior approval is not taken under  FEMA regulations.

In the other hand, RBI circular A.P. (DIR Series) Circular No.132 dated May 21, 2014 on ‘Export of Goods – Long Term Export Advances’ allows exporters to receive long term export advance to be utilized for execution of long term export supply contracts and they were also allowed to use the export advances to liquidate non-NPA rupee loans subject to certain conditions. With a view to ensure that such advances received by the exporters should be utilized only for intended purposes,  the banking regulator has notified following stipulations vide their circular no. RBI/2014-39/DBR.No.BP.BC.85/21.04.048/2014-15 of April 6, 2015.

1. The repayment /refinancing of rupee loans with foreign currency borrowings/export advances (wherever permitted under FEMA guidelines) are permitted subject to the condition that such advances received without the support from the Indian Banking system viz.in the form of Guarantees/Standby Letters of Credit/Letters of Comfort etc.
2. If the foreign currency borrowings/export advances are obtained from lenders who are part of Indian banking system (where permitted); or with support (where permitted) from the Indian banking system in the form of Guarantees/Standby Letters of Credit/Letters of Comfort, etc.; then, in addition to any applicable guidelines issued under FEMA 1999 (42 of 1999), the refinance shall be treated as ‘restructuring’. If the above borrowings/export advances are extended to a borrower who is under financial difficulty and involve concessions that the bank would otherwise not consider, such borrowings/export advances shall be classified/provided for as per extant prudential norms on income recognition, asset classification and provisioning.

In this connection, it is reiterated that export performance guarantees, where permitted to be issued, shall strictly be in the nature of performance guarantee and shall not contain any clauses which may in effect allow such performance guarantees to be utilised as financial guarantees/Standby Letters of Credits. It is further advised that repayment/refinancing of foreign currency borrowings outstanding with a bank, by way of rupee loans or another foreign currency loan (where permitted) or based on support (where permitted) in the form of Guarantees/Standby Letters of Credit/Letters of Comfort, etc. from lenders who are part of Indian banking system would also be governed by the prudential guidelines.