The Reserve Bank of India (RBI) on Tuesday allowed domestic banks to sell their bad loans in manufacturing and infrastructure sectors directly to overseas investors in Single Settlement Exercises (OTS). This decision will allow foreign investors to gain direct exposure to loans to Indian companies.

Defaulters, or distressed borrowers, can sell their assets under the OTS program, in order to take out external commercial loans (ECBs) abroad to repay domestic loans, the RBI said in a statement.

At the same time, Indian companies can take out long-term loans for working capital, “general business purposes” and repayment of loans in national rupees, the statement said.

In addition to easing the pressure on non-performing assets (NPAs) on domestic banks, the RBI’s move may make it easier for companies to raise cheap long-term loans now. Part or all of this amount can be used to repay domestic loans.

The RBI notification states that corporate borrowers can benefit from the ECB “for the repayment of rupee loans used nationally for capital expenditure in manufacturing and infrastructure and classified as SMA-2 or NPA, in the part of any single settlement agreement with lenders “. SMA is a special mention account, in which SMA-2 is the loan not repaid between 60 days and 90 days.

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

“Lending banks are also permitted to sell, by assignment, these loans to eligible ECB lenders, with the exception of overseas branches / subsidiaries of Indian banks, provided that the external commercial borrowing that is results either in accordance with the minimum average maturity period and other relevant standards of the ECB framework, ”the notification states.

Experts said it diversifies the loan market for corporate borrowers.

“This is a good solution, which would move credit out of the Indian banking sector, but it would also increase our forex exposures,” said Abizer Diwanji, national financial services leader for EY. Senior bankers, speaking on condition of anonymity, said Commercial standard that the move potentially opens up two possibilities. First, instead of heading to the Insolvency and Bankruptcy Code (IBC), banks and businesses can now easily enter into an OTS system between themselves, the funds of which must be raised abroad by the defaulting or the banks.

Bankers pointed out that the RBI was clearly uncomfortable with this route and did not allow companies to raise funds overseas to repay domestic loans as the priority of overseas money n is not known. Even if the deal has to go through an ECB, which can only be granted by eligible lenders, who are also regulated entities. But there is a gray area element that is beyond the reach of the RBI or any other Indian regulator to discover.

The fine print

  • Companies can raise long-term loans from the ECB for working capital, general purpose and to repay domestic loans
  • Banks or companies can sell bad loans directly to ECB lenders abroad
  • Loans raised will be part of a single settlement with businesses
  • Loans with an average minimum term of 7-10 years can be leveraged to repay domestic loans
  • The RBI had previously opposed increasing ECBs to repay domestic loans
  • Experts say move may dramatically increase India’s external liability and increase risk
  • National CRAs will lose business and will be forced to merge

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