ECB, Trade Credit and Rupee-Denominated Bonds - Article

Introduction

Indian entities can obtain funding not only from domestic banks and capital markets but also from overseas lenders and investors.

Three important concepts for CAIIB BFM are:

• External Commercial Borrowings (ECB)

• Trade Credits (TC)

• Rupee-Denominated Bonds (RDBs)

Their purposes are different.

ECB is a broader overseas borrowing mechanism.

Trade Credit is specifically connected with financing imports.

Rupee-Denominated Bonds, commonly called Masala Bonds, are INR-denominated overseas borrowings raised through bonds under the ECB framework.

The current 2026 IIBF CAIIB BFM syllabus specifically includes External Commercial Borrowings, Trade Credits and Rupee Denominated Bonds under Module C – International Equity and Debt Products.

A major regulatory change occurred in February 2026, when RBI substantially revised the Foreign Exchange Management (Borrowing and Lending) Regulations. The amended framework expanded eligible borrowers and lenders, revised borrowing limits and maturity rules, relaxed ECB cost restrictions, reviewed end-use restrictions, and simplified reporting.

Learning Objectives

After studying this topic, you should be able to:

• explain the concept of ECB;

• distinguish foreign-currency and INR-denominated ECB;

• understand the current borrowing and maturity framework;

• explain suppliers' credit and buyers' credit;

• distinguish Trade Credit from ECB;

• understand Rupee-Denominated or Masala Bonds;

• identify where foreign-exchange risk lies; and

• recognise outdated ECB rules in CAIIB questions.

What Is External Commercial Borrowing?

An External Commercial Borrowing, or ECB, is borrowing raised by an eligible resident borrower from a recognised non-resident lender in accordance with the FEMA borrowing framework.

Under the revised 2026 regulations, ECB may be denominated in:

• Foreign Currency (FCY); or

• Indian Rupees (INR).

ECB is therefore a debt source, not foreign equity investment.

The borrower has an obligation to service:

• principal;

• interest; and

• other permitted borrowing costs.

Forms of ECB

The 2026 framework allows ECB in a broad commercial borrowing form involving repayment of principal and agreed interest, if any.

It specifically recognises instruments such as:

• loans;

• bonds and debentures structured as ECB;

• Foreign Currency Convertible Bonds (FCCBs);

• Foreign Currency Exchangeable Bonds (FCEBs); and

• other qualifying commercial borrowing arrangements.

Preference shares or debentures received from non-residents that are not fully and mandatorily convertible into equity may also be treated as ECB under the applicable provisions.

Eligible Borrowers – Current 2026 Position

An important change from older ECB rules is the wider borrower base.

Under the revised 2026 framework, an eligible borrower can broadly be a person resident in India, other than an individual, incorporated, established, or registered under a Central or State Act, provided its governing law permits such ECB borrowing.

This is wider than older rules that were strongly linked to entities eligible to receive FDI.

Entities undergoing restructuring or a corporate insolvency resolution process can raise ECB where specifically permitted under the applicable restructuring or resolution plan.

Recognised Lenders

The revised framework also broadened recognised lenders.

ECB may broadly be raised from:

• a person resident outside India;

• an overseas branch of an entity whose lending business is regulated by RBI; and

• a financial institution, or its branch, established in an IFSC,

subject to the applicable conditions.

Related-party ECB must be undertaken on an arm's-length basis.

Current ECB Borrowing Limit

The February 2026 regulations materially changed the earlier borrowing-limit framework.

An eligible borrower may currently raise ECB up to the higher of:

• outstanding ECB of up to USD 1 billion; or

• total outstanding external and domestic borrowing up to 300% of net worth as per the last audited standalone balance sheet.

The specified borrowing limit does not apply in the same manner to eligible borrowers regulated by financial-sector regulators.

Minimum Average Maturity Period

The general current rule is:

Minimum Average Maturity Period (MAMP) = 3 years

For eligible manufacturing-sector borrowers, ECB with an average maturity between one and three years is permitted subject to the prescribed outstanding limit of USD 150 million.

Call or put options cannot normally be exercised before completion of the applicable MAMP.

Why “Average” Maturity Matters

MAMP is not always the same as the final repayment date.

If principal is repaid in several instalments, the timing of each repayment affects the average maturity.

Therefore:

door-to-door final maturity ≠ necessarily average maturity

This distinction is important for CAIIB.

Cost of Borrowing – Important 2026 Change

Under the revised framework, normal ECB borrowing cost must be in line with prevailing market conditions.

The earlier general all-in-cost ceiling structure was substantially liberalised.

However, an eligible ECB having an average maturity of less than three years must comply with the applicable Trade Credit cost ceiling.

This is another area where older study material may be outdated.

Currency Risk in Foreign-Currency ECB

Suppose an Indian company borrows USD.

The company earns mainly in INR.

If the rupee depreciates against USD, more rupees will be required to buy the dollars needed for:

• interest; and

• principal repayment.

Therefore, FCY ECB can create substantial foreign-exchange risk.

A lower overseas interest rate does not necessarily mean lower final borrowing cost.

Treasury must consider:

interest cost + hedge cost + currency movement + other borrowing costs

INR-Denominated ECB

ECB can also be denominated in Indian Rupees.

In that case, the contractual borrowing obligation is determined in INR.

This significantly changes the initial currency-risk allocation.

For a Rupee-denominated overseas investor, depreciation of INR against the investor's home currency can reduce the foreign-currency value of:

• interest received; and

• principal repayment.

Therefore, while the borrowing remains INR-denominated, a substantial part of the INR exchange-rate risk lies with the overseas investor rather than the Indian borrower.

Currency Conversion – Current Position

Another important 2026 change concerns conversion between currencies.

Under the revised framework, ECB currency may now be changed:

• from one foreign currency to another;

• from foreign currency to INR; and

• from INR to foreign currency,

subject to the prescribed exchange-rate condition.

End-Use Restrictions

ECB is not unrestricted money.

The revised regulations prohibit borrowed funds from being used for specified activities, including broadly:

• chit funds;

• Nidhi companies;

• prohibited real-estate activities and farmhouses, subject to specified exceptions;

• certain agricultural and plantation activities;

• trading in Transferable Development Rights;

• securities transactions except specified strategic corporate actions;

• repayment of domestic INR loans originally used for prohibited purposes or classified as NPA; and

• on-lending for prohibited purposes.

The important examination principle is:

ECB availability does not mean freedom of end-use.

Loan Registration Number

An ECB cannot simply be drawn down because the borrower and overseas lender have signed an agreement.

Under the current framework, the borrower must obtain a Loan Registration Number (LRN) through its designated AD Category-I bank before drawdown.

The designated AD bank plays an important role in:

• compliance monitoring;

• reporting;

• drawdown;

• servicing; and

• regulatory communication.

ECB Reporting

The revised 2026 reporting framework uses:

• Form ECB 1 – details of ECB and obtaining LRN;

• Revised Form ECB 1 – changes in previously reported ECB parameters; and

• Form ECB 2 – receipt of ECB proceeds and debt servicing.

Relevant changes and ECB-2 events are generally required to be reported through the designated AD Category-I bank within the prescribed current timelines.

What Is Trade Credit?

Trade Credit (TC) is overseas credit connected specifically with permitted imports into India.

The 2026 FEMA regulations define Trade Credit as credit extended by an overseas supplier or financial institution for permissible imports and recognise two forms:

• Suppliers' Credit

• Buyers' Credit.

Suppliers' Credit

In Suppliers' Credit, the overseas supplier itself allows the Indian importer to pay later.

Conceptually:

Overseas Supplier ships goods → Indian importer receives goods → payment is deferred

The supplier is effectively financing the importer.

Buyers' Credit

In Buyers' Credit, an overseas bank or other eligible financial institution finances the import payment.

Conceptually:

Overseas lender pays supplier → Indian importer owes overseas lender

The supplier receives payment, while the importer receives deferred financing.

Trade Credit Tenor

Under the current framework:

Capital Goods

Trade Credit may have a period of up to:

3 years

Non-Capital Goods

Trade Credit may have a period up to:

1 year or the operating cycle, whichever is less.

The tenor is generally reckoned from the applicable shipment date under the framework.

Trade Credit Amount under the Framework

The existing TC framework provides automatic-route limits per import transaction of:

• up to USD 150 million or equivalent for specified oil/gas refining and marketing, airline and shipping companies; and

• up to USD 50 million or equivalent for other importers.

TC may be denominated in:

• freely convertible foreign currency; or

• Indian Rupees.

Trade Credit vs ECB

The February 2026 ECB framework creates a particularly useful distinction.

Trade Credit with original maturity up to three years, raised under the applicable TC rules, is not treated as ECB.

Therefore, for exam purposes:

Import-linked short credit within TC framework → Trade Credit

Broader external borrowing / borrowing outside TC treatment → ECB

Do not decide merely from the fact that both involve overseas lenders.

What Is a Rupee-Denominated Bond?

A Rupee-Denominated Bond (RDB) is a bond issued overseas where the borrowing obligation is denominated in Indian Rupees.

Such overseas INR bonds are commonly called:

Masala Bonds

They operate within the ECB framework.

RBI has recognised INR ECB through marketable bonds as Rupee-Denominated or Masala Bonds.

Currency Risk in a Masala Bond

Assume an Indian company raises an INR-denominated bond overseas.

The principal and interest are determined in rupees.

If the rupee weakens against the investor's currency, the foreign-currency equivalent received by the investor falls.

Thus, while the bond remains INR-denominated:

Indian borrower → INR liability

Overseas investor → substantial INR exchange-rate exposure

This is a major difference from a USD-denominated ECB, where the Indian borrower directly has a USD liability.

Rupee-Denominated Bond vs Foreign-Currency ECB

The current rules also allow later currency changes subject to the applicable ECB conditions, so the original currency-risk allocation need not remain unchanged throughout the entire borrowing life.

Current Regulatory Treatment of Older Masala-Bond Rules

Older books may reproduce stand-alone RBI circulars on overseas Rupee-Denominated Bonds.

RBI's 8 September 2026 regulatory rationalisation withdrew several old FEMA circulars that had already become redundant, superseded, or non-operative, including the 29 September 2015 circular on issuance of Rupee-Denominated Bonds overseas. The current consolidated ECB/FEMA framework should therefore be used instead of treating that old circular as a live standalone rule.

Practical Banking Application

Case 1: Machinery Import with Deferred Supplier Payment

An Indian importer obtains machinery and the overseas supplier allows payment after two years.

This is:

Suppliers' Credit

Because:

• the borrowing arises from an import; and

• the supplier itself provides the credit.

Case 2: Overseas Bank Finances the Machinery Import

The overseas supplier receives payment immediately, while an overseas bank grants the Indian importer two-year credit.

This is:

Buyers' Credit

Case 3: Indian Company Raises Five-Year USD Loan

An eligible company obtains a commercial USD loan from a recognised overseas lender.

This is:

Foreign-Currency ECB

The Indian borrower bears direct USD exchange-rate exposure unless appropriately hedged.

Case 4: Indian Company Issues INR Bonds Overseas

The company issues overseas bonds whose principal and interest are denominated in rupees.

This is:

Rupee-Denominated ECB / Masala Bond

The bond remains an external borrowing even though it is denominated in INR.

CAIIB Exam Focus

ECB is debt, not foreign equity investment.

ECB can currently be denominated in FCY or INR.

The general current MAMP is three years, subject to specific exceptions.

The 2026 borrowing limit replaced older general USD 750 million automatic-route treatment.

ECB cost is now generally market-linked rather than subject to the old general all-in-cost ceiling structure.

Current ECB borrower eligibility is broader than the old FDI-linked framework.

LRN must be obtained before ECB drawdown.

Trade Credit is specifically connected to imports.

Suppliers' Credit = overseas supplier finances importer.

Buyers' Credit = eligible overseas lender finances import payment.

Capital-goods TC can run up to three years.

Non-capital-goods TC is generally limited to one year or operating cycle, whichever is less.

Rupee-Denominated Bonds are part of the ECB framework.

INR denomination does not mean domestic borrowing.

Older statements that INR ECB can never be changed into FCY are outdated after the 2026 amendment.

Common Exam Traps

Trap 1: ECB Means Only Foreign-Currency Bank Loan

Incorrect.

ECB can currently be denominated in foreign currency or INR and can take different commercial borrowing forms.

Trap 2: Only FDI-Eligible Companies Can Raise ECB

Outdated as a general current rule.

The February 2026 framework widened borrower eligibility.

Trap 3: Current ECB Automatic Limit Is Always USD 750 Million per Financial Year

Outdated.

The borrowing-limit framework was revised in 2026.

Trap 4: ECB Always Has a Five-Year Minimum Maturity

Incorrect.

The general current MAMP is three years, with specified exceptions.

Trap 5: Trade Credit and ECB Are Identical

Incorrect.

TC is specifically linked to imports and operates under its own tenor and other requirements.

Trap 6: Buyers' Credit Is Credit Given by the Overseas Supplier

Incorrect.

That is Suppliers' Credit.

Trap 7: Trade Credit for Every Imported Item Can Run for Three Years

Incorrect.

The treatment differs between capital and non-capital goods.

Trap 8: Masala Bond Is a Domestic Rupee Bond

Incorrect.

It is an overseas INR-denominated borrowing under the ECB framework.

Trap 9: Masala-Bond Borrower Necessarily Bears the Same FX Risk as a USD ECB Borrower

Incorrect while the liability remains INR-denominated.

The currency-risk allocation differs substantially.

Trap 10: INR ECB Can Never Be Converted into FCY

Outdated after the 2026 amendment.

Current rules permit currency changes subject to prescribed conditions.

Trap 11: Overseas Borrowing Can Be Used for Any Purpose

Incorrect.

The current FEMA framework contains explicit end-use restrictions.

Trap 12: Signing the ECB Agreement Is Enough to Draw Funds

Incorrect.

The borrower must obtain the required LRN before drawdown.

Memory Technique

Remember:

ECB = External Borrowing – Broad

TC = Trade-linked Credit

RDB = Rupee Debt Abroad

For Trade Credit:

Supplier gives credit → Suppliers' Credit

Bank finances buyer → Buyers' Credit

For currency risk:

FCY ECB → Borrower watches FX

INR Masala Bond → Overseas investor watches INR, while it remains INR-denominated.