RBI’s Draft ECB Framework 2025: Key Reforms, Liberalization Measures | External Commercial Borrowings

Syllabus Topic: GS3 – Economy

The ECB framework has been in the news recently due to significant, proposed rationalization and liberalization measures announced by the RBI, primarily based on the Draft ECB framework released in October 2025, building on the foundation of a strengthening external sector.

External Commercial Borrowings: Basics Explained for UPSC Prelims and Mains

External Commercial Borrowings (ECB) refer to commercial loans availed by eligible resident entities in India from recognized non-resident lenders. These are a vital source of external financing for the Indian economy, complementing Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).

Governing Act & Authority: Regulated under the Foreign Exchange Management Act (FEMA), 1999, by the Reserve Bank of India (RBI) through its Master Directions and Circulars.
Instruments: ECBs include bank loans, bonds/debentures, trade credits, and financial leases.
Routes of Access: Borrowings are permitted via two routes:
- Automatic Route: No prior approval from the RBI is required, provided the entity adheres to specified parameters (amount, end-use, maturity, all-in-cost ceiling).
- Approval Route: Requires prior approval from the RBI, applicable for entities or transactions that fall outside the parameters of the Automatic Route.
Key Parameters (Subject to change):
- Eligible Borrowers: Generally, entities eligible to receive FDI.
- Recognised Lenders: Entities that are residents of FATF/IOSCO compliant countries, multilateral/regional financial institutions, etc.
- Minimum Average Maturity Period (MAMP): The minimum time for which the loan must remain outstanding.
- All-in-Cost Ceiling: The maximum permissible spread/margin over a benchmark interest rate.
- End-Use Restrictions: Specifies permissible and non-permissible end-uses for the borrowed funds (e.g., investment in capital goods is generally permitted, while land purchase/speculation is often restricted).

Key Proposed Reforms in the Draft ECB Framework (October 2025)

The reforms aim to transition the framework from a rigid, ceiling-based system to a more risk-based and market-oriented one.

Borrowing Limit	Fixed monetary cap (e.g., USD 750 million/year).	Linked to Net Worth (Higher of USD 1 billion OR 300% of Net Worth).	Aligns borrowing capacity with the borrower’s financial strength.
All-in-Cost Ceiling	Prescriptive caps on interest rate spread over benchmarks.	Removal of the All-in-Cost Ceiling for most ECBs.	Allows market-determined, competitive pricing and aligns with global practices.
End-Use Flexibility	Specific and sometimes restrictive end-uses.	Liberalized End-Use, including use in FDI-compliant real estate projects (crucial recent clarification).	Greater flexibility for corporates in deploying funds.
Eligible Borrowers/Lenders	Limited eligibility pool.	Expansion of eligible borrower and lender base.	Broadens access to global capital.
Currency Conversion	Restrictions on changing currency from INR to FCY.	Proposed flexibility to change currency between FCY and INR.	Reduces hedging rigidity and cost.