Module: | MODULE A: INTERNATIONAL BANKING
Q207: Consider the following statements regarding the pricing limits and maturity parameters of External Commercial Borrowings:
1. The All-in-cost ceiling includes the rate of interest, guarantee fees, and other expenses in foreign currency, but completely excludes commitment fees.
2. The standard Minimum Average Maturity Period for general External Commercial Borrowings is prescribed as 3 years, though exceptions exist for specific sectors.
3. The All-in-cost ceiling for foreign currency loans is now benchmarked against widely accepted Alternative Reference Rates following the global phase-out of the London Interbank Offered Rate.
Which of the statements given above is or are INCORRECT?
2. The standard Minimum Average Maturity Period for general External Commercial Borrowings is prescribed as 3 years, though exceptions exist for specific sectors.
3. The All-in-cost ceiling for foreign currency loans is now benchmarked against widely accepted Alternative Reference Rates following the global phase-out of the London Interbank Offered Rate.
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: Statement 2 is true; the standard Minimum Average Maturity Period is 3 years, forcing companies to take long-term debt rather than volatile short-term loans.
Statement 3 is true; due to the cessation of the London Interbank Offered Rate, the Reserve Bank of India mandates the use of benchmark Alternative Reference Rates, like the Secured Overnight Financing Rate, plus a maximum permitted spread of 500 basis points.
Statement 1 is false.
The All-in-cost ceiling includes the interest rate, guarantee fees, underwriting fees, and explicitly includes commitment fees; it only excludes withholding tax payable in Indian Rupees.
Historical Context: The transition away from the London Interbank Offered Rate was the most massive structural change in global debt markets in decades, prompted by international manipulation scandals, forcing the Indian central bank to update all its borrowing formulas in recent years.
Causal Reasoning: The causal logic for having a comprehensive All-in-cost ceiling that includes hidden fees is transparency.
If the central bank only capped the interest rate, foreign lenders would simply charge 0 percent interest while demanding exorbitant operational and commitment fees, thereby defeating the entire purpose of cost control.