RBI allows ECB for MFIs

The RBI has recently issued a notification considering the specific needs of the micro finance sector, allowing the MFIs to raise ECB up to USD 10 million or equivalent during a financial year for permitted end-uses, under the Automatic Route.

This notification issued by the RBI in December 2011 can be seen as a welcome change for the Micro Financing institutions and the NGOs engaged in such activities.

Read further to know about the guidelines issued on external commercial borrowing by MFIs by Reserve Bank of India. You can see the notification here.

 MFIs eligible for ECB

Under the RBI Guidelines, following MFIs engaged in micro finance activities shall be considered as eligible borrowers to avail of ECBs:-

●      MFIs registered under the Societies Registration Act, 1860;

●      MFIs registered under Indian Trust Act, 1882;

●      MFIs registered either under the conventional state-level cooperative acts, the national level multi-state cooperative legislation or under the new state-level mutually aided cooperative acts (MACS Act) and not being a co-operative bank;

●      Non-Banking Financial Companies (NBFCs) categorized as ‘Non Banking Financial Company-Micro Finance Institutions (NBFC-MFIs);

●      Companies registered under Section 25 of the Companies Act, 1956 and involved in micro finance activity.

These criteria are further supported by other conditions. The guidelines prescribe that the MFIs registered as societies, trusts and co-operatives and engaged in micro finance ought to have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange. The MFIs also need to have a certificate of due diligence on `fit and proper’ status of the Board/Committee of Management of the borrowing entity from the designated Authorized Dealer (AD) bank.

Recognized lenders

As far as authorized lenders are concerned, Non Baning Financial Corporations- Micro Finance Institutions will be permitted to avail of ECBs from multilateral institutions, such as IFC, ADB etc./ regional financial institutions/international banks / foreign equity holders and overseas organizations.

Companies registered under Section 25 of the Companies Act and engaged in micro finance shall have the facility to avail ECBs from international banks, multilateral financial institutions, export credit agencies, foreign equity holders, overseas organizations and individuals.

Overseas organizations and individuals needs to comply with the following safeguards for lending:

a) 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 organized 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.

b) 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.

Permitted End-use of ECB

The designated authorized dealer must ensure that the ECB proceeds are utilised for lending to self-help groups or for micro-credit or for bona fide micro finance activity including capacity building.

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 10 million during a financial year. The amount of ECB that NGOs engaged in micro financing can avail has also been increased to USD 10 million or equivalent per financial year under the automatic route as against the present limit of USD 5 million or equivalent per financial year. 

-Srishti Aishwarya, 3rd Year, NUJS