Home - Soft Loan

Soft Loans For Business

With the sole motive of promoting external finance and foreign trade, Foreign Exchange Management Act, 1999 and Foreign Exchange Regulations, 2000 were enforced to control the negative impact of the liberalization. It prolonged up to outlining the confines of the foreign exchange and clarifying the miscellaneous role of the apex bank of India in it. It also materialized the conception of lending by non-resident Indians or Foreigners to Indian citizens. The global financial markets are a very beneficial source of debt finance, particularly for businesses in India, owing to the Low interest rates @ 2.75% (per annum) fix for the complete tenure prevailing globally when compared to the Indian financial markets. Financial markets outside are considered to be as the most lucrative alternative of borrowing/financing attributable to the cheaper interest rates as equated to the Indian financial markets. Reserve Bank of India (“RBI”) has been a bit conventional with the assistance of the tools of law that is Foreign Exchange Management Act, 2000(“FEMA”) and Foreign Exchange Regulations, 2000. Recently, in regards to the aspect of overseas borrowing, be it commercial or private, rules of the RBI are long debated. The laws have made external borrowings to be wholly legal and are soft loan facilitators but there have been so much of compliances and requirements so as to materialize those transactions. These can be taken under the professional supervision of soft loan facilitator in India like us.

Brief guidelines given by FEMA in regard to business loans in India, particularly the availability of soft loans for businesses for Indian corporates, accompanied by restrictions as approved by RBI have been laid down below:

Borrowings in foreign exchange in the form of Soft Loan in India


Definition: Foreign Soft Loan for businesses or overseas borrowings refer to commercial loans given in the form of bank loans, buyers’ credit, suppliers’ credit and shareholder’s loans. These are availed by any Indian borrower from non-resident moneylenders. These must have at least an average maturity of 3 years.



ParticularsAutomatic RouteApproval Route
How is borrowing availed? Under the Automatic Route, the Indian corporation can apply with its native Indian bank for an authorization to avail foreign soft loan India if some parameters (interest rate / maturity) are met. If the parameters are met, the obligatory loan registration number will be given within a particular timeframe. Under the Approval Route, the Indian corporation has to seek the permission of the RBI to avail this foreign lending particularly if certain parameters are proposed to be surpassed. The RBI will gauge the application exhaustively and it typically takes some months before a verdict is given.
Who can take these loans? Any company listed under the Companies Act, 1956, other than a financial intermediate such as a Bank, financial institution, housing finance firm and a non-banking finance corporation) is qualified to borrow under this Schedule
• Non-Government Organizations and Micro Finance Institutions involved in micro-finance goings-on
• Any other entity as indicated by the Reserve Bank of India.
(a) Any business registered under the Companies Act, 1956.
(b) Financial organizations dealing entirely with infrastructure or export economics such as IDFC, IL& FS, Power Finance Corporation, Power Trading Corporation, IRCON and Exim Bank.
(c) Banks and financial institutes which had partaken in the textile or steel zone restructuring package as permitted by the Central Government.
(d) Entities falling outside the purview of the Automatic Route according to Schedule I.
(e) Any other entity as indicated by the Reserve Bank.
Who can lend? (a) International bank or any export credit agency or global capital market, or
(b) Multilateral financial institutes, viz., IFC, ADB, CDC etc., or
(c) Foreign collaborator or foreign equity holder as itemized by the Reserve Bank, or
(d) Supplier of equipment’s only if the amount of loan raised does not surpass the whole cost of the equipment being provided by the lender, or
(e) Any other eligible entity as approved by the Reserve Bank in consultation with Government of India.
(a) International bank or any export credit agency or global capital market, or
(b) Multilateral financial institutes, viz., IFC, ADB, CDC etc., or
(c) Foreign collaborator or foreign equity holder as itemized by the Reserve Bank, or
(d) Supplier of equipment’s only if the amount of loan raised does not outdo the whole cost of the equipment being supplied by the lender, or
(e) Any other qualified entity as approved by the Reserve Bank in consultation with Government of India
Purpose (End-use) • For investment (such as import of capital merchandises, new ventures, modernization/ expansion of prevailing production units) in real sector – industrial segment including Small and Medium Enterprises (SME) and infrastructure segment – in India
• for first stage acquirement of shares in the disinvestment procedure and also in the obligatory second stage offer to the public in the Government’s disinvestment programme of PSU shares,
• for direct investment in overseas Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) conditional on the existing guidelines on Indian Direct Investment in JV/WOS abroad, any other authorized purpose as quantified by the Reserve Bank.
• For investment (such as import of capital merchandises, new ventures, modernization/ expansion of prevailing production units) in real sector – industrial sector including small and medium enterprises (SME) and infrastructure segment – in India.
• for first stage acquirement of shares in the disinvestment procedure and also in the obligatory second stage offer to the public in the Government’s disinvestment programme of PSU shares;
• (for direct investment in overseas Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) conditional on the prevailing guidelines on Indian Direct Investment in JV/WOS overseas.
Constraint on End Use The foreign borrowing in India shall not be utilized for any other purpose including the following commitments, viz. On-lending, investment in capital (stock) market, investment in real estate trade, working capital requirements, general corporate purpose sand reimbursement of rupee loans. The foreign direct investment in form of soft loan shall not be used for any other purpose including the following purposes, viz. On-lending, investment in capital (stock) market, investment in real estate business, working capital needs, general corporate purpose and reimbursement of Rupee loans.
Recent Amendment   On 4 September 2013, the Reserve Bank of India (RBI) issued a circular which permits Indian companies to borrow moneys from foreign shareholders also for funding general corporate purposes. This is a chief relaxation of law. Some conditions still have to be satisfied and the loan must be applied for by the Indian company with the RBI under the so called Approval Route (Circular No. 31 A.P. (DIR Series), dated September 4, 2013). The circular has immediate effect.