External Commercial Borrowings for affordable housing and slum rehabilitation projects

With a view to provide impetus to infrastructure development in India and more importantly in the housing sector, the Finance Minister while presenting Budget 2012 had proposed to allow External Commercial Borrowings (“ECBs”) for low cost affordable housing projects.  The proposal, made in the backdrop of shortage of housing for low income groups in major cities and towns, has now been formalized through the issuance of A P (DIR Series) Circular No 61 dated December 17, 2012 (“Circular”) issued by the Reserve Bank of India (“RBI”) (click here to

download the RBI Circular). 

The RBI vide the Circular has liberalized the ECB policy to permit developers/builders avail ECBs under the approval route for low cost affordable housing projects and has therein, set out detailed guidelines to regulate the same.

Key features

The ECB route for raising funds can be accessed:

·          For development of approved low cost affordable housing projects (A project in which atleast 60 percent of the permissible Floor Space Index (FSI) would be for units having maximum carpet area upto 60 square meters);

·          For approved slum rehabilitation projects;

·          By housing finance companies for financing prospective owners of low cost affordable housing units; and

·          By the National Housing Bank (“NHB”) for financing low cost affordable housing units by individual borrowers and for on-lending to developers.

We have, in the ensuing tables endeavored to summarise the regulations contained in the Circular in connection with ECBs for low cost affordable housing scheme (“Scheme”):

Table I: Eligible Borrowers - Developers/Builders
Conditions stipulated	Conditions associated with the developer/builder proposing to avail ECB under the Scheme: The developer/builder undertaking the low cost affordable housing project(s) (defined subsequently in this bulletin) should: ·            Be a company registered under the Companies Act, 1956; ·            Have a proven financial track record and be credentialed in terms of quality and delivery; ·            Have a minimum 5 years experience in undertaking residential projects; and ·            Not have defaulted in any of their financial commitments to banks/ financial institutions or any other agencies. Conditions associated with the low cost affordable housing projects for which the ECB is proposed to be utilized: The project should: ·             Not be a matter of litigation; ·            Be in conformity with the provisions of master plan/development plan of the area.  The layout should conform to the land use stipulated by the town and country planning department for housing projects; and ·             Have received all necessary clearances from various bodies including Revenue Department with respect to land usage/environment clearance, etc., and the same should be available on record
Permissible end use	For low cost affordable housing projects: ·         The ECB proceeds shall be utilized only for development of low cost affordable projects and not to be used for acquisition of land. ·         As mentioned earlier, a low cost affordable housing project is a project in which at least 60 percent of the permissible Floor Space Index (FSI) would be for units having maximum carpet area upto 60 square meters. For Slum Rehabilitation Projects (“SRPs”): ·          SRPs will also be eligible as permissible end use under this Scheme. ·          The parameters for SRPs to qualify as eligible projects would be set by the Committee constituted by the Housing & Urban Poverty Alleviation (HUPA) which administers SRPs.

Table II: Eligible Borrowers - Housing Finance Companies/ National Housing Bank
Conditions stipulated	Conditions associated with the Housing Finance Company(s) (“HFC”) proposing to avail ECB: ·         The HFC should be registered with the National Housing Bank (“NHB”) and operating in accordance with the regulatory directions and guidelines issued by NHB; ·         De-minimus tests: Paid-up capital (as per latest audited balance sheet) INR 50 crores Net Owned Funds (“NOF”)for past three financial years INR 300 crores ·         Threshold limits: Net non-performing assets 2.5 percent of net advances Amount of ECB availed 16 times of NOF of the HFC ·         The ECB shall be swapped into INR for the entire maturity on fully hedged basis.
Permissible end use	By HFCs: ·         The ECB proceeds shall be utilized for financing prospective owners of low cost affordable housing unit capped at INR 25 lakhs for an individual buying a housing unit the cost of which shall not exceed INR 30 lakhs. By NHB: ·         For financing low cost affordable housing units of individual borrowers; and ·         For on-lending to developers/builders of low cost affordable housing projects who satisfy the conditions stated in Table I above subject to interest rate spread set by the RBI

It would be important to note that the Circular has capped the aggregate limit of ECB that can be raised by the eligible borrowers under this Scheme at USD 1 billion for the Financial Year (“FY”) 2012-13. Further, eligible borrowers under this Scheme would not be permitted to raise Foreign Currency Convertible Bonds (FCCBs).

Procedure for obtaining approval for availing ECB

Step I: Obtain clearance from NHB

·         The builder/developer shall apply to NHB, which shall act as the nodal agency in the prescribed format (guidelines with respect to format of application, project monitoring, etc are to be issued by NHB).

·         NHB, on being satisfied with the projects’ eligibility as a low cost affordable housing project, shall forward the application to RBI for its consideration under the approval route.

Step II: Apply to RBI

·         The builder/developer shall apply to the RBI through its authorized dealer in the manner prescribed by the regulations on being advised by the NHB to approach the RBI.

Other conditions / parameters

All other ECB parameters, such as, recognized lender, minimum average maturity period, all-in-cost ceilings, restrictions on issuance of guarantee, choice of security, parking of ECB proceeds, prepayment, refinancing of ECB, reporting requirements remain unchanged and shall be complied with.  The following table summarises some of the key aspects of the ECB guidelines:

Parameters	Relevant regulations
Recognised lender	·            International banks; ·            International capital markets; ·            Multilateral Financial Institutions (“FIs”) / regional FIs and Government owned development FIs; ·            Export credit agencies; ·            Suppliers’ of equipment; ·            Foreign collaborators; and ·            Direct and indirect foreign equity holders (subject to satisfaction of conditions with regard to percentage of holding and ECB liability to equity ratio).
Average Maturity Period	Amount of ECB in a financial year Minimum AMP Upto USD 20 million or its equivalent 3 years Above USD 20 million or its equivalent and upto USD 750 million or its equivalent 5 years Above USD 750 million or its equivalent In accordance with the terms of approval issued by the RBI.
All-in-cost ceilings	AMP All-in-cost ceiling over 6 month LIBOR[1] 3 years and upto 5 years 350 basis points More than 5 years 500 basis points