Module: | MODULE A: INTERNATIONAL BANKING
Q203: Consider the following statements regarding the end-use restrictions applied to External Commercial Borrowings:
1. The borrowed funds can be freely utilized for investment in domestic capital market instruments such as equity shares of other Indian companies.
2. The negative list strictly prohibits the use of these foreign funds for real estate activities and the purchase of land.
3. Borrowers are prohibited from using the proceeds for on-lending to other entities for activities specified in the negative list.
Which of the statements given above is or are INCORRECT?
2. The negative list strictly prohibits the use of these foreign funds for real estate activities and the purchase of land.
3. Borrowers are prohibited from using the proceeds for on-lending to other entities for activities specified in the negative list.
Which of the statements given above is or are INCORRECT?
✅ Correct Answer: A
🎯 Quick Answer:
Option A is correct because only statement 1 is incorrect.Structural Breakdown: To prevent asset bubbles, the central bank enforces a strict negative list.
Statement 2 is true; investing foreign debt into the domestic real estate market or land purchasing is banned.
Statement 3 is also true; a borrower cannot act as a conduit to bypass the rules by on-lending the funds to someone else for restricted activities.
Statement 1 is false because investing in the domestic capital market using foreign debt is strictly prohibited under the negative list.
Historical Context: The negative list was designed based on lessons learned from the Asian Financial Crisis of 1997, where unhedged foreign debt was heavily poured into speculative real estate and stock markets, leading to catastrophic economic collapse when foreign capital exited.
Causal Reasoning: The causal logic for banning real estate and capital market end-uses is to ensure that foreign debt is utilized purely for productive, real-economy asset creation, such as manufacturing plants or infrastructure, rather than fueling speculative asset price inflation.