Types of Credit Facilities for Corporate Borrowers: Key RBI Guidelines for Credit
Facilities
Introduction
In addition to the guidelines that deal with prudential supervision and investor protection of banks in general, the RBI also issues
specific guidelines pertaining to certain types of credit products. These guidelines aim to mitigate exposure risks and provide
indicative pricing approaches related to export and import credit facilities.
This lesson provides a high-level introduction to product-specific guidelines for the following facility types:
External Commercial Borrowings (ECBs)
Trade Credits
Export Credits in INR
Export Credits in Foreign Currency
Guarantees
By the end of this lesson, you should be able to:
Discuss the key guidelines related to the commercial credit facilities listed above.
Indicate the eligibility requirements for the key export credit facilities.
The lesson is no substitute for reading the actual RBI guidelines. As a credit officer, you need to be familiar with the details of
those guidelines when assessing and appraising any credit request for such loans, in addition to the lending policies of your
bank. These are general features and you must keep updated with current RBI Guidelines.
What You Need to Know
To mitigate exposure risks and provide indicative pricing approaches to export and import credit facilities, the RBI issues and
maintains a number of circulars, Master Circulars, and Master Directions regarding those facilities. (Master circulars are now
being phased out. Once a Master Direction on a subject is issued, the Master Circular on that subject is withdrawn.)
Show External Commercial Borrowings (ECBs)
An External Commercial Borrowing (ECB)is a commercial loan raised by eligible resident entities from a recognised
non-resident lender. The RBI’s framework for ECBs allows eligible borrowers to raise ECBs in INR or any other freely
convertible currency, such as USD and GBP. If a foreign currency denominated loan to an Indian borrower is
extended by an Indian bank via one of its offshore branches, the domestic Indian bank arranges the ECB, conducts
the credit risk assessment, books the credit exposure and carries the credit risk. The Indian bank’s offshore branch
merely acts as a funding/sourcing vehicle and is guaranteed by its domestic Indian parent bank. Over time, ECBs
have grown in popularity and now make up a sizeable portion of Indian banks' corporate credit portfolios. Indian
borrowers will opt for an ECB for currency matching purposes if they have earnings in foreign currency, or to
diversify their debt funding sources. A borrower could also potentially benefit from lower interest rates on these
credits.
The RBI guidelines stipulate parameters such as minimum maturity, permitted and non-permitted end-uses,
maximum all-in-cost ceiling, and more.
Show ECB Financing and Reporting Requirements
External Commercial Borrowing facilities are subject to specific rules pertaining to
Companies that are eligible to raise ECBs
(including manufacturing, software development, shipping, airlines and infrastructure)
Permitted borrowing purposes and utilisation of funds
(“end uses,” e.g., for import of capital goods and services, expansion projects, overseas investments)
Minimum average maturities
(three, five and ten years, sometimes dependent on the amount borrowed)
Maximum amounts that can be borrowed under an ECB
(depending on the type of borrower)
The currency of the ECB
(any freely convertible foreign currency as well as (INR)
Hedging requirements for the facility
Security requirements for the facility
Reporting requirements
(e.g., the lending bank needs to obtain a Loan Registration Number (LRN) from the RBI)
The ECB program framework distinguishes three tracks, and some of the rules listed above differ by track
Track I: Medium-term foreign currency denominated ECB with minimum average maturity of 3-5 years.
Track II: Long-term foreign currency denominated ECB with minimum average maturity of 10 years.
Track III: Indian Rupee (INR) denominated ECB with minimum average maturity of 3-5 years.
Trade Credits
(RBI Master Circular on External Commercial Borrowing and Trade Finance, July 1, 2011)
Show Trade Credits
Trade credits relate to the credits extended by the overseas supplier, bank, or financial institution for maturity up to
five years for imports into India. Trade credits can take the form of supplier credits or buyer credits.
In the case of a supplier’s credit, the overseas supplier (exporter) of goods and services extends a credit to the
Indian importer. Typically, the exporter arranges that financing with its overseas bank.
A buyer’s credit, on the other hand, is a credit for payment of imports into India arranged by the importer (buyer)
from an overseas bank or financial institution. However, instead of directly accepting the credit risk of the Indian
importer/buyer, the overseas bank typically grants the credit against a letter of comfort or guarantee from the
importer’s/buyer’s bank.
The RBI guidelines on trade credits contains provisions for approval routes, maturities, cost ceilings, and reporting
requirements, among others.
Show Export Credits
Whereas trade credits (supplier/buyer credits) are short- to medium-term credits to Indian importers for the
payment of imported goods and services into India, export credits are short-term financings to Indian exporters.
Their purpose is two-fold:
1. Pre-shipment Credits provide Indian exporters with loans or advances to finance working capital needs
related to the borrower’s supply chain activities, i.e. the many steps and activities involved before the goods
or services are ready for export. These include the purchase of raw materials, the processing and
manufacturing of the goods, packaging, and actual shipment. These are referred to as “pre-shipment credits”
or “packing credits.”
Ordinarily, pre-shipment credits are provided against specific export orders, and hence each packing credit
facility should be maintained as a separate account for the purpose of monitoring the tenor and end-use of
funds. A variance to this stipulation are so-called “Running Accounts,” which can be extended by banks to
exporters when the necessary documents from the overseas importers are initially available.
2. Post-shipment Credits provide Indian exporters with loans or advances to bridge the time gap from the
shipment of the goods to receipt of the sales proceeds from the overseas importer/buyer. These credits are
referred to as the “post-shipment credits.”
Both pre- and post-shipment credits can be denominated in either Indian Rupees or foreign currency. The RBI
guidelines lays out the rules and regulations on key export credit parameters, including period of advance, maturity,
disbursement provisions, the interest rate charging regime and repayment (liquidation). Provisions for export
credits in foreign currency are similar to those in local currency unless specified otherwise.
Export credits qualify for meeting banks’ Priority Sector Lending (PSL) targets. They are therefore priced at very
attractive rates for exporters.
The RBI guidelines include other provisions to support and foster Indian export that credit officers need to be
familiar with, including the requirement for simplified and timely sanctioning of export credit requests.
In addition to following the regulatory framework pertaining to export credits laid out by the RBI, banks are expected
to have in place their own internal lending policies that credit officers need to follow.
Show Guarantees
In addition to loans and other forms of advances, banks also issue guarantees on behalf of their customers for the
benefit of other parties. Guarantees are contractual obligations whose terms specify their purpose, tenor/maturity,
the conditions under which the guarantee can get triggered and more. There are various types of guarantees, the
most common of which are financial guarantees and performance guarantees. Guarantees issued by banks are
classified as “contingent liabilities” in a bank’s financial statements, as the obligation on the part of the issuing bank
is contingent on a particular event occurring.
Financial Guarantee
A financial guarantee is a contract in which the bank promises to make a monetary payment to the beneficiary in the
event of a payment default on the part of the bank’s customer. As such, the bank assumes the credit risk of its
customer, which is similar to extending a loan or advance to the same borrower, with the difference that actual cash
outflow under the guarantee is delayed and contingent upon the customer’s default.
Performance Guarantee
A performance guarantee is a contract in which the bank promises to provide monetary compensation to a
beneficiary in the event that the bank’s customer fails to deliver on an agreed performance, e.g., the timely delivery
of a project to certain specifications.
Letter of Credit
A letter of credit (LC) is a form of payment guarantee most frequently used in international trade, where it is also
referred to as a documentary credit. In trade finance, banks issue letters of credit on behalf of the importer for the
benefit of the exporter. Upon the presentation of specified documents, the issuing bank will make the payment to
the exporter, and get reimbursed by its customer (importer).
Guarantees and LCs create credit exposure for banks. To ensure the safety and soundness of banks, the volumes
and characters of such contingent liabilities will need to be taken into account, monitored, and managed in a
prudent manner.
The RBI has therefore issued guidelines with respect to the Indian banks’ guarantee business, including:
Banks should prefer shorter maturities over longer maturities.
Banks should avoid unsecured guarantees in large amounts and for longer tenors.
Banks should avoid customer concentrations.
What You Need to Do
You now understand the RBI’s prescribed guidelines pertaining to various credit facilities. As such, it is not only important
for you as a credit professional to understand and assess a borrower’s credit risk, but also have a full understanding of the
product compliance requirements that you are being asked to sanction. You should visit the RBI website and familiarise
yourself with its guidelines as they relate to the credit request you are dealing with.
You also need to keep in mind that the RBI regularly updates its master circulars and directions, which may render
previously issued guidelines ineffective or redundant. As such, it is important to keep abreast of such changes.
If in doubt, reach out to your manager or Compliance team if you have queries regarding any product-related RBI
guidelines.
How This is Useful
This lesson has helped you develop an initial high-level overview of some selected regulatory guidelines pertaining to various
credit facilities. Given the extent and level of detail of the RBI’s many circulars, you should now be able to assess and structure
the credit facility in line with relevant guidelines. You are now also equipped to ascertain whether certain terms and conditions
require referral to the Compliance team for further clarification.
Suppose you are tasked with credit analysis of a company, ABC Limited, engaged in the infrastructure sector. ABC Limited has
requested a USD 10 million External Commercial Borrowing (ECB) with average maturity of three years. You now know that an
ECB raised by an infrastructure company should have a minimum maturity of five years.
Another company, DEF Limited, has approached your bank for issuance of a 10-year bank guarantee in favour of another bank,
XYZ bank, in Ghana for a turnkey project. You are now aware that you should confirm whether XYZ Bank has funded over 5
percent of the project requirements.
Questions You Should Ask
These are some of the questions you should ask to ensure that credit facilities covered in this module are compliant with RBI
Guidelines.
Does the client meet RBI Guidelines for an ECB (jurisdiction of borrower, currency of loan, term of loan, end-user,
cost ceiling etc.)?
Is there an appropriate hedge in place for the ECB?
Are the appropriate reporting requirements in place?
Has the distinction between buyer’s and supplier’s credit been appropriately made in the case of trade credits?
Are the RBI rules on approval routes, maturities, cost ceilings and reporting requirements being followed?
Are you familiar with and following your bank’s internal lending policy on export credit?
Is the appropriate form of guarantee being offered to the client (financial guarantee, performance guarantee or
letter of credit)?
Will the guarantee issued fall within RBI guidelines on limiting credit risk in the bank’s portfolio of guarantee
business?
Knowledge Check
Question 1
In which currency can ECBs be raised under the External Commercial Borrowings (ECBs) framework?
Any freely convertible currency
INR or any freely convertible currency
Any currency
Only U.S. Dollars and INR
The RBI’s framework for ECBs allows eligible borrowers to raise ECBs in INR or any other freely convertible currency, such as
USD and GBP.
Question 2
Which of the following aspects are governed under the RBI’s framework for External Commercial Borrowings (ECBs)?
Eligibility of companies that can borrow ECBs
End-use of the proceeds of the ECB
Tenor and amount of ECBs availed
Security offered on the ECB
Only A and C
All of the above
The RBI’s framework for ECBs lists the rules governing all of the above aspects, as well as hedging and reporting
requirements, eligible lenders, refinancing options, and more.
Question 3
Guarantees issued by banks are shown as contingent liabilities on the bank’s books. The RBI has therefore issued guidelines with
respect to this business. Which of the following statements are not true in relation to these guidelines?
Banks should prefer longer maturities to shorter maturities.
Banks should avoid unsecured guarantees in large amounts and for longer tenors.
Banks should avoid customer concentrations.
Banks should prefer shorter maturities to longer maturities of guarantees as long-term facilities carry higher risk.
Question 4
Is this statement true or false?
Pre-shipment credit is ordinarily provided against specific export orders and is monitored for the end-use of funds. However,
subject to conditions, pre-shipment credit can also be provided on a “Running Accounts” basis, where exporters need not presubmit the export orders.
True
False
Running account pre-shipment facility is typically provided to established and creditworthy exporters and helps them execute
export orders smoothly. Documents are submitted within a pre-agreed time period with the bank.
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