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India – Banking & Finance September Review.

23 October, 2013

 

Legal News & Analysis – Asia Pacific – India – Banking & Finance

 

  • RBI has, by a circular dated September 4, 2013, permitted borrowings under the external commercial borrowing route to be utilised for general corporate purposes under the approval route, subject to the following conditions:
 

i. The lender (i.e. the foreign equity holder) directly holding at least 25% of the equity of the borrower;
ii. End-uses for any other purpose restricted under the ECB guidelines, not be undertaken with the proceeds; and
iii. No prepayment or repayment to be permitted before the lapse of seven years from the average drawdown date.

 

  • Following an announcement made by the recently appointed RBI Governor Dr. Raghuram Rajan, RBI constituted a Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households chaired by Mr. Nachiket Mor (‘RBI Committee’). The terms of reference of the RBI committee include framing a clear and detailed vision; and devising design principles to guide institutional frameworks and regulations for achieving financial inclusion and financial deepening in India. Ms Zia Mody, the managing partner of AZB & Partners is one of members of the RBI Committee.

 

  • RBI has, by a circular dated August 14, 2013, advised that with effect from August 24, 2013 and July 26, 2013, respectively, fresh deposit liabilities in the nature of FCNR(B) and NR(E), with maturities beyond three years, will not be taken into account for calculating the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). By another circular on the same date, the existing regulatory interest ceiling applicable for NR(E) deposits with maturities of over three years, has been removed and banks are free to set interest rates for such deposits as they deem fit. Similarly, the existing regulatory interest ceiling applicable for FCNR(B) deposits of maturity three to five years has been raised to LIBOR + 4.00% (from LIBOR + 3.00%). These measures indirectly amount to incentives for banks to raise such deposits, which are exclusively funded through inward remittances of foreign currency and appear to be another step in encouraging foreign currency inflow into India.

 

  • RBI has, by a circular dated September 2, 2013, permitted certain banks to make variations to the methodology of computation of their Base Rates. This dispensation has been permitted for banks that have not yet completed one year of banking operations as on September 2, 2013 and is available till the completion of one year. Banks commencing banking operations after September 2, 2013 are also permitted to revise the methodology within one year from commencement.

 

  • RBI has, by a circular dated September 3, 2013, mandated that housing loans sanctioned by banks to individuals for purchase of houses under construction must be disbursed solely to correspond with the scheduled progress of construction. This puts an end to the practice of upfront disbursement of a disproportionately large amount of the loan in the absence of corresponding physical completion of the housing project. It may be noted that this practice is customary in project finance where disbursements are usually tied to monitoring and certification of project progress during the construction period.

 

 

AZB

 

For further information, please contact:

 

Zia Mody, AZB & Partners
zia.mody@azbpartners.com

 

Abhijit Joshi, AZB & Partners 
abhijit.joshi@azbpartners.com


Shuva Mandal, AZB & Partners 

shuva.mandal@azbpartners.com

 

Samir Gandhi, AZB & Partners
samir.gandhi@azbpartners.com


Percy Billimoria, AZB & Partners 

percy.billimoria@azbpartners.com

 

Aditya Bhat, AZB & Partners 
aditya.bhat@azbpartners.com

 

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