Foreign Currency Term Loan (FCTL) in India: Rates and Guide

Overview

A Foreign Currency Term Loan, or FCTL, is a medium to long-term loan denominated in a foreign currency, usually US dollars or euros, extended to Indian companies. It is a subset of the broader ECB framework regulated by RBI under FEMA 1999. The key distinction from a regular ECB is that FCTLs are typically structured as bilateral term loans from foreign banks or overseas branches of Indian banks.

FCTLs are popular with large Indian exporters, multinational subsidiaries and infrastructure companies because the interest rate in foreign currency is often significantly lower than rupee borrowing rates. For a company with natural dollar revenues, an FCTL is a cost-efficient way to fund capital expenditure without taking on significant currency risk.

Indian branches of global banks like Citibank, Standard Chartered, Deutsche Bank and HSBC, as well as overseas branches of SBI, Bank of Baroda and Canara Bank, are active arrangers and lenders of FCTLs for Indian corporate borrowers.

Interest Rates

FCTLs are priced over SOFR (Secured Overnight Financing Rate), which replaced USD LIBOR in June 2023. The spread over SOFR depends on the borrower’s credit profile, tenor and collateral.

Loan Tenor	SOFR Rate (Approx 2024)	Spread	All-In Rate
3 years	~5.30%	100-200 bps	6.30% – 7.30% p.a.
5 years	~5.10%	150-250 bps	6.60% – 7.60% p.a.
7 years	~4.90%	200-300 bps	6.90% – 7.90% p.a.

The rupee equivalent cost after hedging through cross-currency swaps is typically in the range of 9% to 11%, which for many high-rated corporates is still cheaper than domestic loans.

Eligibility

• Indian companies with investment grade credit rating from a domestic or international rating agency
• Companies with forex earnings provide a natural hedge and are preferred borrowers
• Minimum loan size is typically USD 5 million for bilateral FCTLs
• Compliance with RBI’s ECB master directions including minimum average maturity periods
• Borrower must not be classified as wilful defaulter by any bank
• No negative list end-use violations

Documents Required

• Audited financial statements for the last 3 years and latest quarterly management accounts
• Company’s existing debt profile including all outstanding loans
• Board resolution authorising FCTL and forex borrowing
• Form ECB filed with AD bank
• Loan agreement, security documents and hedging arrangement details
• Credit rating report from CRISIL, ICRA or international rating agency

Application Process

Step 1: Appoint an Arranger or Approach a Lender

Large corporates typically work with an arranging bank that structures the FCTL and syndicates it. Smaller borrowers may approach a foreign bank branch directly with a term sheet request.

Step 2: Credit Due Diligence

The overseas lender or arranging bank conducts credit due diligence including review of financials, site visits, management meetings and legal review of security documents.

Step 3: Term Sheet and Negotiation

A term sheet is issued specifying loan amount, tenor, interest rate, repayment schedule, covenants, and security. The borrower negotiates terms including financial covenants like leverage ratio and interest coverage ratio.

Step 4: ECB Compliance

Form ECB is filed with the AD bank for RBI’s records. The loan is eligible under the automatic route if it meets all ECB conditions.

Step 5: Drawdown and Hedging

Funds are drawn into the company’s account in India. If the company does not have natural forex revenues, it must hedge the currency exposure per RBI’s mandatory hedging guidelines for ECBs below a certain tenor.

Frequently Asked Questions

Is FCTL the same as ECB?

An FCTL is a type of ECB. ECB is the broader regulatory category for all foreign currency and rupee denominated overseas borrowings. FCTL specifically refers to term loans in foreign currency, typically bilateral bank loans.

What are the mandatory hedging requirements?

As per RBI’s ECB master directions, borrowers in sectors other than infrastructure must mandatorily hedge 70% of their ECB exposure if the average maturity is up to 5 years. Infrastructure companies have more flexibility but are encouraged to hedge.

Can a private limited company take an FCTL?

Yes, private limited companies can raise FCTLs as long as they meet the ECB eligibility criteria including minimum average maturity and permitted end-use norms. The company need not be listed on any stock exchange.