RBI/2004-05/434
A.P.(DIR Series) Circular No. 40
April 25, 2005
To
All banks authorised to deal in foreign exchange
Madam/Sirs,
External Commercial Borrowings (ECB) for
Non-Government Organisations (NGOs) engaged in micro finance activities under
Automatic Route
Attention of Authorised Dealers is invited to
the announcement in the Union Budget for 2005-06 regarding access to ECB by
qualified NGOs engaged in micro finance activities.
2. Accordingly, it has been decided that NGOs
engaged in micro finance activities may be permitted to raise ECB up to USD
5 million during a financial year for permitted end-use, under Automatic Route.
Detailed guidelines on ECB for micro finance activities with necessary safeguards
are set out below.
3. The concerns emanating from ECB for NGOs
engaged in micro finance activities can be categorized in to four types: (i)
whether the borrower is genuine. (ii) whether ECB funds are utilised for genuine
purpose, (iii) credentials of the overseas lender of ECB and (iv) systemic implications
of such ECB flows including the risks of foreign currency borrowing by such
entities. The following framework addresses these issues.
4. Eligible Borrower : NGOs engaged
in micro finance activities would be eligible to avail ECB. Such NGO (i) should
have a satisfactory borrowing relationship for at least 3 years with a scheduled
commercial bank authorised to deal in foreign exchange and (ii) would require
a certificate of due diligence on `fit and proper’ status of the board/committee
of management of the borrowing entity from the designated Authorised Dealer
(AD).
5. Permitted End-use : The designated
AD must ensure that the ECB proceeds are utilised for lending to self-help groups
or for micro-credit or for bonafide micro finance activity including capacity
building.
6. Recognised Lender : ECB funds should
be routed through normal banking channel. ECB from following internationally
recognised sources i.e. (i) international banks, (ii) multilateral financial
institutions, (iii) export credit agencies may be availed. Furthermore, overseas
organisations and individuals complying with following safeguards may lend ECB.
i. Overseas organisations planning
to extend ECB would have to furnish a certificate of due diligence from an
overseas bank which in turn is subject to regulation of host-country regulator
and adheres to Financial Action Task Force (FATF) guidelines to the designated
AD. The certificate of due diligence should comprise the following (i) that
the lender maintains an account with the bank for at least a period of two
years, (ii) that the lending entity is organised as per the local law and
held in good esteem by the business/local community and (iii) that there is
no criminal action pending against it.
ii. Individual Lender has to obtain
a certificate of due diligence from an overseas bank indicating that the lender
maintains an account with the bank for at least a period of two years. Other
evidence /documents such as audited statement of account and income tax return
which the overseas lender may furnish need to be certified and forwarded by
the overseas bank. Individual lenders from countries wherein banks are not
required to adhere to Know Your Customer (KYC) guidelines are not permitted
to extend ECB.
7. Amount of ECB : With a view to ensure
minimization of systemic risk, the maximum amount of foreign currency borrowings
of a borrower is capped at USD 5 million during a financial year.
8. Other ECB Parameters : All other ECB parameters
such as minimum average maturity, all-in-cost ceilings, restrictions on issuance
of guarantee, choice of security, parking of ECB proceeds, prepayment and refinancing
of ECB under the Automatic Route should be complied with. The designated AD
has to ensure at the time of draw down that the forex exposure of the borrower
is hedged.
9. Reporting Arrangements :Arrangements: Borrowers
are required to comply with the reporting arrangements of ECB such as submission
of Form 83 through the designated AD to the Reserve Bank for allotment of loan
registration number prior to draw down of the loan and filing of monthly ECB-2
Return.
10. These amendments to ECB policy will come
into force with immediate effect and will be subject to review from time to
time.
11. Necessary amendments to the Foreign Exchange
Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 dated
May 3, 2000 are being issued separately.
12. Authorised Dealer banks may bring the contents
of this circular to the notice of their constituents and customers.
13. The direction contained in this circular
has been issued under sections 10(4) and 11(1) of the Foreign Exchange Management
Act, 1999 (42 of 1999) and is without prejudice to permissions / approvals,
if any, required under any other law.
Yours faithfully,
(F. R. Joseph)
Chief General Manager
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