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

RBI allows domestic banks to sell NPAs overseas as part of one-time settlement
Money Banking Wednesday, July 31, 2019 - 19:57

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.

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.   

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