RBI Governor Sanjay Malhotra Clarifies ECB Rules for Real Estate, Backs Acquisition Finance
Reserve Bank of India Governor Sanjay Malhotra clarifies that relaxed external commercial borrowing (ECB) rules apply only to FDI-compliant real estate projects, not speculative ventures. He also backs the idea of allowing banks to finance acquisitions, a move expected to benefit the real economy.
Real EstateEcbAcquisition FinanceRbiFdiReal EstateNov 07, 2025
Malhotra stated, “I wish to clarify that ECB will be permitted only for FDI-compliant real estate projects and remain prohibited for speculative dealing or loans for land or property trading.” The existing ECB rules prohibit such loans for real estate activities, ensuring that funds are used for productive and regulated purposes.
The RBI Governor also expressed optimism about net inflows to India under foreign investments, including ECB and NRI deposits. He expects these inflows to remain strong for the rest of the year, bolstering India's economic position on the global stage.
Regarding the proposal to allow banks to finance acquisitions, Malhotra noted that this practice is already common among finance companies and bond markets in India. “Worldwide, acquisition finance is an integral element of an evolved financial system that helps in better allocation of financial resources,” he said. Allowing banks to undertake acquisition finance will benefit the real economy and provide banks with additional business opportunities.
The RBI draft includes several guardrails to ensure safety while allowing banks and their stakeholders to benefit from this new business. These measures include limiting bank funding to 70% of the deal value, setting limits on the debt-to-equity ratio, and imposing aggregate exposure limits relative to the tier 1 capital of the bank. Eligibility criteria will also be established to ensure that only qualified entities can access these funds.
On the revised draft ECB Framework, Malhotra explained that it is designed to align with India's strong external sector, which has seen a significant rise in net inflows. “The calibration of the ECB framework is a natural step in India's financial evolution, grounded in strong fundamentals, guided by prudence, and inspired by confidence in the economy's capacity to engage with global finance on its own terms,” he stated.
The removal of the all-in-cost ceiling on ECB loans is a key feature of the new framework, aimed at encouraging competitive rates and promoting prudent hedging behaviors. The expansion of the universe of eligible lenders will improve pricing efficiency, and linking borrowing limits to the borrower's net worth under the automatic route will enhance ease of doing business.
Malhotra also addressed the specific borrower framework, noting that no other country has such norms. The earlier guidelines were implemented when banks were dealing with high levels of stress, a situation that is no longer prevalent. Under the new rules, RBI has removed the aggregate fund limit for large borrowers and penalties for exceeding these limits.
Revising the limit on loans against shares is part of a regular review process, accompanied by a loan-to-value (LTV) framework. The proposed removal of limits on loans against debt instruments, while retaining regulatory limits for equity instruments, recognizes the fundamental difference between these two types of securities. “The key risk a debt instrument carries is credit risk, which is expected to be managed as part of the broader credit risk management framework,” Malhotra explained.
He also highlighted the introduction of the Insolvency and Bankruptcy Code (IBC) and out-of-court settlement mechanisms, which have fundamentally transformed India's credit culture. “We recognize that there are no free lunches in regulation. While enhancing stability, there are trade-offs between stability and efficiency, and we will keep this trade-off in mind while formulating our regulations,” he assured.
Overall, Malhotra's clarifications and proposals aim to create a more robust and efficient financial system, benefiting both the real economy and the banking sector.
Frequently Asked Questions
What is the main clarification provided by RBI Governor Sanjay Malhotra regarding ECB rules?
RBI Governor Sanjay Malhotra clarified that relaxed external commercial borrowing (ECB) rules apply only to FDI-compliant real estate projects and not for speculative purposes.
How will allowing banks to finance acquisitions benefit the economy?
Allowing banks to finance acquisitions will benefit the real economy by providing additional business opportunities and better allocation of financial resources.
What are the key features of the revised draft ECB Framework?
The revised draft ECB Framework includes the removal of the all-in-cost ceiling, expansion of eligible lenders, and linking borrowing limits to the borrower's net worth to enhance ease of doing business.
What changes are proposed in the specific borrower framework?
The specific borrower framework has removed the aggregate fund limit for large borrowers and penalties for exceeding these limits, reflecting a more evolved financial system.
How has the introduction of IBC and out-of-court settlement mechanisms impacted India's credit culture?
The introduction of the Insolvency and Bankruptcy Code (IBC) and out-of-court settlement mechanisms has fundamentally transformed India's credit culture, making it more robust and efficient.
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