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External Commercial Borrowings (ECBs)

Any money that has been borrowed from foreign sources for financing the commercial activities in India are called External Commercial Borrowings. The Government of India permits ECBs as a source of finance for Indian Corporates for expansion of existing capacity as well as for fresh investment.

The ECBs are defined as money borrowed from foreign resources including the following:

  • Commercial bank loans
  • Buyers???????? credit and suppliers???????? credit
  • Securitised instruments such as Floating Rate Notes and Fixed Rate Bonds etc.
  • Credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.

Objective of ECB

Government permits the ECBs as an additional source of financing for expanding the existing capacity as well as for fresh investments. The ECB policy of the Government seeks to emphasize the priority of investing in the infrastructure and core sectors such as Power, telecom, Railways, Roads, Urban infrastructure etc. There is also emphasis on the need of capital for Small and Medium scale enterprises.

ECB ????Vs FDI

ECB means any kind of funding other than Equity.????If the foreign money is used to finance the Equity Capital, it would be termed as Foreign Direct Investment. The ECB should satisfy the ECB regulations stipulated by the Government or its agencies such as RBI. The Bonds, Credit notes, Asset Backed Securities, Mortgage Backed Securities or anything of that nature are included in ECB. The following are not included in the ECBs:

  • Any Investment made towards core capital of an organization such as equity shares, convertible preference shares or convertible debentures.
  • ????Any other direct capital is not allowed in ECB.

How to access ECB

External Commercial Borrowing in India can be accessed via two routes viz.????Automatic Route and Approval Route. Under Automatic Route approval of the Reserve Bank or the Government of India not required.

Benefits to Borrower

  • ECB funding helps in many purposes such as paying to suppliers in other countries etc that may not be available in India.
  • The cost of funds borrowed from external sources at times is cheaper than domestic funds.
  • The borrower can diversify the investor base. It opens the international market for the borrowers.

Effects on Economy

  • TheGovernment of India has a controlled policy on ECBs and via its policies, it would like to make companies use the ECB to primarily fund the infrastructure and SME sector of the economy.
  • The benefit for the economy is that the low cost international funds????can improve inflow of more money in these sectors.
  • Indian companies get loans through ECB at lower cost and lower their cost of borrowing and cost of production which increases their competitiveness in international market.
  • The External commercial borrowings increase the external debt of the country. Therefore it has to be matched with growth of foreign exchange reserves in the country so as to maintain solvency.
  • Increase in ECB is accompanied with increase in currency risk as there will be depreciation in rupee, which will lead to increased burden on the borrower as the value of the rupee depreciates.

Regional Rural Banks

On the basis of Narasimham????committee????????s recommendations, a Regional Rural Banks Ordinance was promulgated in September 1975, which was replaced by the Regional Rural Banks Act 1976.

The RRBs were owned by three entities with their respective shares as follows:

  • Central Government ???????? 50%
  • State government ???????? 15%
  • Sponsor bank ???????? 35%

Regional Rural Banks were conceived as low cost institutions having a rural ethos, local feel and pro poor focus. Every bank was to be sponsored by a ???????Public Sector Bank”.

Regional Rural Banks are regulated by National Bank for Agriculture and Rural Development (NABARD).

Problems with Regional Rural Banks

  • The original assumptions were belied as within a very short time, most banks were making losses.
  • The RRB concept was based upon the policy that they would lend only to the weaker sections of rural society, charging lower interest rates, opening branches in remote and rural areas and keep a low cost profile.
  • The Khusrau Committee of 1989, noted that the weaknesses of RRBs are endemic to the system and non-viability is built into it, and the only option was to merge the RRBs with the sponsor banks.
  • The objective of serving the weaker sections effectively could be achieved only by self-sustaining credit institutions. RRBs were finding themselves unable to sustain because of the mounting losses due to imprudent commercial policy.
  • Thus, Khusrau Committee (aka Agricultural Credit Review Committee) said that the RRBs have no justifiable cause for continuance and recommended their mergers with sponsor banks. But by that time, the branch network had expanded so large that it would be political unwise for the government to merge the RRBs with sponsor Banks.

Recommendations of Narsimham Committee on RRBs

  • The Narsimham Committee in 1990s also reiterated that the RRBs should be merged with the sponsor banks.
  • Regional Rural Banks (Amendment) Act, 2015 – Key Facts

    Authorised capital: This amendment ????increases the authorised capital of each Regional Rural Bank (RRB) from Rs 5 crore to Rs 2000 crore divided into Rs 200 crore of fully paid share of Rs 10 each. As per the parent Act the Rs 5 crore share capital of RRBs is split into 5 lakh shares of Rs 100 each.

  • Issued capital: It also provides that the authorised capital issued by any RRB????????s shall not be reduced below Rs 1 crore and shares in all cases to be fully paid up shares of Rs 10 each. Shareholding:
  • The Bill allows RRBs to raise capital from sources other than the central and state governments, and sponsor banks.
  • Board of directors: The Bill adds provision that any person who is a director of an RRB is not eligible to be on the Board of Directors of another RRB. It also mentions that directors will be elected by shareholders based on the total amount of equity share capital issued to such shareholders.
  • Tenure of directors: The bill raises the tenure of directors to 3 years from existing 2 years. The Bill also states that no director can hold office for a total period exceeding six years.

On 31 March 2016, there were 56 RRBs (post-merger) covering 525 districts with a network of 14,494 branches.



Comparison: SARFAESI Act & Amendment Bill 2016

It will modify the following four Acts:

1) SARFAESI Act, 2002,
2) The Recovery of Debts due to Banks and Financial Institutions Act, 1993,
3) The Indian Stamp Act, 1899; &
4) The Depositories Act, 1996.


S4A – A Discussion

  • The recent Scheme for Sustainable Structuring of Stressed Assets (S4A) by Reserve Bank of India can curb fresh NPA slippages, but has limited applicability It will help weak borrowers with revivable business models:
  • S4A is yet another tool provided to banks to tackle the growing challenge of stressed assets emanating from loans given to large corporates turning bad.
  • This is an improvisation over the two other tools announced by the RBI in the past 18 months to address asset quality challenges at banks:
  • structuring of project loans under the 5:25 scheme, and strategic debt restructuring (SDR) and could help banks limit fresh slippages to non-performing assets (NPAs) from large corporate exposures.
  • It is estimated that the stressed assets in the Indian banking system will touch a high of ~Rs 8 lakh crore by end of the current fiscal.
  • S4A envisages the determination of a sustainable debt level for stressed borrowers, and bifurcation of outstanding debt into sustainable debt and equity/quasi-equity instruments, which are expected to provide upside to lenders when the borrower turns around. It will cover projects that have started commercial operations and have outstanding loan of over Rs 500 crore.
  • It enhances the integrity and transparency of the resolution process through the appointment of an external agency for technical evaluation and also oversight of an independent committee comprising experts.
  • The 5:25 and SDR schemes have had their challenges which has limited their application across a larger set of stressed assets. The key challenge with 5:25 is that banks which structured loans under the scheme by stretching repayment periods had to mandatorily protect the net present value (NPV) of the loans refinanced.
  • And under the SDR scheme, banks had to take majority stake (51%) in the stressed company along with management control and also find a new buyer within a short span of 18 months from the reference date, failing which the asset is classified as a non-performing one. The S4A scheme partially addresses the challenges of both the 5:25 scheme and SDR.

Advantages of S4A

  • The relief provided by S4A is on the following lines: ??????? Unlike in 5:25, where banks could not take a haircut after structuring, S4A permits banks to do so by converting the unviable portion of debt to equity. ??????? Unlike in SDR, after conversion to equity, banks do not have a find a new buyer in any defined period of time. This provides a longer timeframe for turnaround and provides the bank an opportunity to benefit from an increase in equity valuation. ??????? S4A incentivises existing promoters to opt for this scheme as they can continue to hold majority stake. Further, banks have the option of holding optionally convertible debentures instead of equity, which might be more preferred.

Limitations of S4A

  • S4A scheme cannot be applied to all cases of stressed exposure. ??????? It can be applied to only operational projects and not to projects under construction. ??????? It does not allow for any rescheduling of original tenure of repayment or repricing of debt. ??????? Sustainable debt under the scheme — which needs to be at least 50% of total debt — is derived based only on the ability of current cash flows to cover debt repayment. It cannot factor in incremental cash flows that could accrue as the external environment improves. Given the significantly low level of current cash flows of most highly leveraged companies in the vulnerable sectors such as infrastructure and iron & steel, the number of stressed corporate loan accounts which could benefit from this scheme could be very low. Yet, despite the limitations, if implemented successfully, the S4A scheme can strengthen the ability of lenders to deal with stressed assets, which have potential to be revived by providing an avenue for reworking the financial structure of entities facing genuine difficulties.

S4A – Scheme for Sustainable Structuring of Stressed Assets


In order to strengthen the lenders???????? ability to deal with stressed assets, Reserve Bank of India has been issuing, from time to time, guidelines and prudential norms on stressed assets resolution by regulated lenders.

In order to ensure that adequate deep financial restructuring is done to give projects a chance of sustained revival, the Reserve Bank, after due consultation with banks, has decided to facilitate the resolution of large accounts, which satisfy the conditions set out in the following paragraphs.

Eligible Accounts

For being eligible under the scheme, the account????should meet all the following conditions:

(i) The project has commenced commercial operations;

(ii) The aggregate exposure (including accrued interest) of all institutional lenders in the account is more than Rs.500 crore (including Rupee loans, Foreign Currency loans/External Commercial Borrowings,);

(iii) The debt meets the test of sustainability as outlined in????below.

Debt Sustainability

A debt level will be deemed sustainable if the Joint Lenders Forum (JLF)/Consortium of lenders/bank conclude through independent techno-economic viability (TEV) that debt of that principal value amongst the current funded/non-funded liabilities owed to institutional lenders can be serviced over the same tenor as that of the existing facilities even if the future cash flows remain at their current level. For this scheme to apply, sustainable debt should not be less than 50 percent of current funded liabilities. .

Sustainable Debt

The resolution plan may involve one of the following options with regard to the post-resolution ownership of the borrowing entity:

(a) The current promoter continues to hold majority of the shares or shares required to have control;

(b) The current promoter has been replaced with a new promoter, in one of the following ways:

  1. Through conversion of a part of the debt into equity under SDR mechanism which is thereafter sold to a new promoter;
  2. In the manner contemplated as per Prudential Norms on Change in Ownership of Borrowing Entities (Outside SDR Scheme);

(c) The lenders have acquired majority shareholding in the entity through conversion of debt into equity either under SDR or otherwise and

  1. allow the current management to continue or
  2. hand over management to another agency/professionals under an operate and manage contract.

Note: Where malfeasance on the part of the promoter has been established, through a forensic audit or otherwise, this scheme shall not be applicable if there is no change in promoter or the management is vested in the delinquent promoter.

In any of the circumstances mentioned above, the JLF/consortium/bank shall, after an independent TEV, bifurcate the current dues of the borrower into Part A and Part B as described below;

(a) Determine the level of debt (including new funding required to be sanctioned within next six months and non-funded credit facilities crystallising within next 6 months) that can be serviced (both interest and principal) within the respective residual maturities of existing debt, from all sources, based on the cash flows available from the current as well as immediately prospective (not more than six months) level of operations. For this purpose, free cash flows (i.e., cash flow from operations minus committed capital expenditure) available for servicing debt as per latest audited/reviewed financial statement will be considered. Where there is more than one debt facility, the maturity profile of each facility shall be that which exists on the date of finalising this resolution plan. For the purpose of determining the level of debt that can be serviced, the assessed free cash flow shall be allocated to servicing each existing debt facility in the order in which its servicing falls due. The level of debt so determined will be referred to as Part A in these guidelines.

(b) The difference between the aggregate current outstanding debt, from all sources, and Part A will be referred to as Part B in these guidelines.

(c) The security position of lenders will, however, not be diluted and Part A portion of loan will continue to have at least the same amount of security cover as was available prior to this resolution.

The Resolution Plan

The Resolution Plan shall have the following features:

  1. There shall be no fresh moratorium granted on interest or principal repayment for servicing of Part A.
  2. There shall not be any extension of the repayment schedule or reduction in the interest rate for servicing of Part A, as compared to repayment schedule and interest rate prior to this resolution.
  3. Part B shall be converted into equity/redeemable cumulative optionally convertible preference shares. However, in cases where the resolution plan does not involve change in promoter, banks may, at their discretion, also convert a portion of Part B into optionally convertible debentures. All such instruments will continue to be referred to as Part B instruments in this circular for ease of reference.

For RBI circular click here

GRAF – Governance, Reward and Accountability Framework


The Bank Boards Bureau (BBB) has evolved a Governance, Reward and Accountability Framework (GRAF) ???????? an elaborative roadmap for Public Sector Banks (PSBs) to make them more competitive and to ensure that they have the ability to compete successfully against private sector banks, small finance and payments banks, foreign banks and non-banking finance companies; and to prepare them for possible mergers in future. The roadmap was chalked out by Vinod Rai, Chairman of BBB on April 14, 2017.

GRAF Methodology:????

GRAF will ensure that the best corporate governance practices are followed by the public sector banks while functioning strictly according to the various prevailing central laws, including the Companies Act, 2013, Banking Regulation Act, 1949, and Securities and Exchange Board of India (listing obligations and disclosure requirements) Regulations, 2015. Governance model of the public sector banks would be upgraded as recommended by the Basel Committee by incorporating a code of conduct for the bank officials, compensation reforms and rating systems. The BBB????????s GRAF move comes in the context of PSBs facing challenges on various fronts, including competition from new entrants, aggressive private banks and NBFCs eating into their market share on the loans front, and continuously increasing non-performing assets (NPAs) called ???????Bad Loans??????? in the layman????????s language.

Bank Boards Bureau (BBB):????

The BBB was operationalized after Finance Minister Arun Jaitley called for PSBs to be competitive, in his Budget speech of 2016-17 to make recommendations for the selection of the chiefs of PSBs and financial institutions and help them develop strategies and capital-raising plans. The Bureau started functioning from April 01, 2016 as an autonomous recommendatory body of Government of India housed in RBI’s Central Office, Mumbai.BBB has evolved a code of conduct and ethics that can be enforced across all PSBs to ensure the right behaviour. It has also come up with compensation reforms so that best practices can be introduced in PSBs on the lines already prevalent in Central Public Sector Enterprises. The BBB has evolved a relative performance rating system to assess the performance of PSBs, its directors and employees; and performance evaluation system based on which decision-making for the extension/termination of a whole-time director. BBB would also be advising the government on evolving training and development programmes for management personnel in PSBs and help banks develop a leadership succession plan.

Current Affairs – 31.03.2017

Five Associate Banks to merge with State Bank of India

Bharatiya Mahila Bank to merge with SBI


The government said it has decided to merge Bharatiya Mahila Bank with State Bank of India (SBI), the country’s largest lender, to ensure greater banking outreach to women.

Explaining the rationale behind the merger, the finance ministry said the SBI group already has 126 exclusive all-women branches across the country while the Bharatiya Mahila Bank (BMB) has only seven.

“The proportion of administrative and managerial cost in the BMB is much higher to reach the same coverage. For the same cost, a much higher volume of loans to women could be given through the SBI,” it said.
The ministry said there was a need to achieve the objectives of affordable credit to women as well as propagation of women-centric products quickly through a wider network and lower cost of funds.

In the three years since the Bharatiya Mahila Bank was established, it has extended loans of Rs. 192 crore to women borrowers while the SBI group has provided loans of about Rs. 46,000 crore to women borrowers.

“The decision to merge the BMB with the SBI has been taken in view of the advantage of the large network of the SBI, among other things,” the statement added.

The SBI has a large outreach of more than 20,000 branches and lowest cost of funds in the sector. Of the total workforce of around 2 lakh employees in the SBI, 22 per cent are women.

Set up in 2013, Bharatiya Mahila Bank has 103 branches with its presence in almost all the states. The total business of the bank is about Rs. 1,600 crore.


capital infusion for 10 PSU banks


capital infusion for 10 PSU banks

In support of weak and non-performing public sector banks (PSBs), the Finance Ministry has chalked out a turnaround-linked ???????8,586-crore capital infusion plan for 10 PSBs.

The capital allocation would be linked to quarterly milestones on which all related parties ???????? Banks???????? Board, management, employees and unions must commit, the Department of Financial Services has said.

The 10 banks identified are Allahabad Bank (???????418 crore); Andhra Bank (???????1,100 crore); Bank of India (???????1,500 crore); Bank of Maharashtra (???????300 crore); Central Bank of India (???????100 crore); Dena Bank (???????600 crore); IDBI Bank (???????1,900 crore); Indian Overseas Bank (???????1,100 crore); UCO Bank (???????1,150 crore) and United Bank of India (???????418 crore).

To avail themselves of the capital support, the identified PSBs require a tripartite Memorandum of Understanding (MoU) between the government, PSB management and employees of the PSB concerned.

This MoU is to commit all the participants to the agreement for a time bound plan beginning 2017-18 onwards with quantifiable and measurable milestones which can be monitored on quarterly basis, according to the Finance Ministry.

SBI Caps has been inducted to design detailed bank-wise plan based on which the tripartite agreement can be signed.

The indicative list of initiatives which will form part of the milestone under the MoU will include active NPA management and strengthening of credit underwriting and monitoring process; arranging capital from the market; continuing plan for disposal of non-core assets; divestment of subsidiary stake to closure of loss making domestic/international branches.

Another initiative is rationalisation and reduction of administrative, operating expenses including temporary restructuring of employees???????? benefits (in case of need) which can be reversed as the bank manages to successfully turnaround.

Capital roadmap

As per the Indradhanush roadmap announced in August 2015, the government had promised to infuse ???????70,000 crore in public sector banks over four years. At the same time, they will have to raise further ???????1.1 lakh crore from the markets to meet their capital requirement under Basel-III norms..

In line with this blueprint, PSBs were to get ???????25,000 crore in each fiscal, 2015-16 and 2016-17. Besides, ???????10,000 crore each were to be infused in 2017-18 and 2018-19.

Finance Minister Arun Jaitley had announced in his Budget speech a capital infusion of ???????10,000 crore for PSBs in 2017-18.

Story this fiscal

The Centre has already announced fund infusion of ???????22,915 crore, out of the ???????25,000 crore earmarked for 13 PSBs for the current fiscal. Of this, 75 per cent has already been released to them.

The first tranche was announced in July this fiscal. The main objective was to enhance their lending operations and enable them to raise more money from the market.

sukanya samriddhi yojana (ssy) – a scheme for girl child

The novel sukanya samriddhi yojana (ssy) envisaging financial security for girl child launched by modi government has been one of most attractive small savings scheme. thusfar, over 76 lakh account have opened accounting rs 3,000 crores. however, off late scheme undergone a few tweaks. with this, also addressed some ambiguities which were prevalent in original rules scheme.

Following are some of the details that need to be kept in mind while opting for SSY

Opening of Account: This account can be opened for maximum two girl children in a family. A Parent or a legal guardian is eligible to open an account in the name of the girl child anytime from her birth till she attains the age of 10 years. This provision, now, has been extended to include even adopted daughters.

Eligibility: The girl child strictly has to be an Indian resident throughout the tenure of the scheme. Incase if the residency status of the girl child changes in the interim, no interest shall be payable from the date of change and the account will be closed prematurely.

Tenure: Deposits now can be made for a total of 15 years from the date of opening the account. Earlier it was 14 years.

Mode of Investment: Apart from cash and cheque, deposits can also be made electronically if the bank or post office has access to the facility of core banking solution.

Interest Rate: Interest rates associated with SSY will be reset every quarter, similar to other small savings scheme. Accordingly, till June 2016, these deposits will be earning 8.6% as compared to 9.2% during 2015-2016.

For the purpose of interest computation every month, the lowest account balance between 10th and the end of the month, will be considered. In effect, the amount deposited after the 10th will not earn any interest for that month.

Quantum: The minimum investment to be made is at Rs 1,000 and maximum investment remains capped at Rs 1.5 lakh a year. Any excess amount deposited will not earn any interest. Additionally, such an excess amount can be withdrawn anytime.

Penalty in case of non-maintenance: Incase if the minimum investment of Rs 1,000 is not deposited every year, then the account will be considered to be in default. If this ‘in default’ status continues for 15 years, the amount deposited shall attract an interest rate equivalent to the Post Office Savings Account interest rate which is currently at 4% per annum.

Incase if the default is due to the death of the guardian of the???? Account???? holder???? who???? opened???? the???? account, then such an account will continue to attract the interest rate notified by the Government.

Regularising default account: By paying a fine of Rs 50 for each year the account has been in default along with such minimum specified amount for the year or years of default.

Tax: The amount invested is eligible for deduction under Section 80 C and follows Exempt-Exempt-Exempt (EEE) tax regime

Maturity: The account will mature on completion of 21 years and no further interest will be accrued even if such an account is not closed. Earlier, interest accrual was till the time the account was closed.

Additionally, in earlier rules, the account could be deemed closed at the time of marriage of the girl child. However, in the new rules, the account can be very well be continued till the age of 21, even if married in the interim.

Transfer of account: The account can now be switched between banks and post office and vice versa by payment of Rs 100 as fee. Incase, the switching is due to change of residence, then a proof of change of residence needs to be submitted and no fee will be charged.

Withdrawal: Earlier, one could withdraw 50% of the accumulated amount for education purpose, provided the girl is 18 year of age or passed Std10th. Now, the withdrawal will be allowed on the basis of the actual fees payable. It can either be withdrawn as a lump sum or in course of five annual installments.

In case of marriage, the accumulated sum can be withdrawn one month before or three months after the date of marriage. At that time, it is imperative to provide age proof inorder to prove that the child is not below 18 years of age.

Pre-mature closure: Earlier premature closures would be allowed at any point in time. However, now it is not allowed now before the completion of five years. But redemption is allowed in cases of extreme compassionate???? grounds???? such???? as???? medical???? support???? in life-threatening???? diseases???? of???? the???? Account???? holder???? or???? death???? of???? the???? guardian. In such instances, interest paid will be equivalent to post office savings.

Documents at the time of closure: Application for account closure, proof of identity, residence and citizenship

Despite all these changes, financial planners are of the view that SSY continues to remain one of the most attractive debt scheme when it comes to saving for a girl child. Even though there are multiple other options available in the market in the form of mutual funds, SSY triumphs when it comes to tax efficiency and predictability, making it an attractive option for a conservative investor. Not only is the interest rate offered higher than fixed deposits, the gains accumulated over the years are also tax free.


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Current Affairs

External Commercial Borrowings (ECBs) Read more
Regional Rural Banks Read more
Comparison: SARFAESI Act & Amendment Bill ... Read more
S4A - A Discussion Read more
S4A - Scheme for Sustainable Structuring o... Read more
GRAF - Governance, Reward and Accountabili... Read more
Current Affairs - 31.03.2017 Read more
Bharatiya Mahila Bank to merge with SBI Read more
capital infusion for 10 PSU banks Read more
sukanya samriddhi yojana (ssy) - a scheme ... Read more