Mumbai (ABC Live): For nearly two decades, India’s approach to external commercial borrowing (ECB) under the Foreign Exchange Management Act (FEMA) followed one simple idea: open access to foreign capital and let markets decide where it should go. Over time, this idea delivered scale. As a result, India now has one of the largest ECB ecosystems among emerging economies. Consequently, corporates, infrastructure developers, NBFCs, and financial institutions regularly raise funds overseas.

However, scale also created strain. Over the years, a share of foreign borrowing began flowing into land, refinancing deals, capital market positions, and group treasury activity. As a result, asset prices rose faster than real productive activity. At the same time, global interest-rate hikes after 2022 increased both currency risk and repayment risk.

Therefore, RBI’s Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 mark a major course correction.

Rather than asking only who can borrow and how much, RBI is now asking a more basic question:

What should foreign borrowing be used for?

In short, RBI is moving from a quantity-of-capital approach to a quality-of-capital approach.

Official Source

For reference, readers may access the official Gazette notification here:
👉 https://egazette.nic.in/WriteReadData/2026/242345.pdf

Accordingly, this Gazette legally amends the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.

Why RBI Changed the Regime

First, RBI saw that a growing share of the ECB was not creating new assets. Instead, money was often recycled within balance sheets. As a result, foreign borrowing began to look more like speculative capital than development finance.

Second, global financial conditions shifted. In particular, higher interest rates, unstable capital flows, and a strong dollar made short-term or weakly structured foreign debt more risky.

Third, the RBI needed better visibility. Earlier, compliance depended on circulars and after-the-fact reporting. Now, however, RBI prefers clear rules written directly into regulations.

Importantly, this amendment does not stand alone. Rather, it forms part of a wider FEMA overhaul, including the FEMA Export and Import Regulations, 2026, analysed here:
👉 https://abclive.in/2026/01/17/fema-export-and-import-regulations-2026/

Together, these reforms show RBI’s effort to modernise India’s cross-border capital system.

Data Context: Why This Matters

Table 1: India’s External Commercial Borrowing — Broad Trend

Interpretation: ECB is rising steadily. Meanwhile, average maturity is falling. Therefore, repayment risk is increasing.

Table 2: Stylised Use of ECB Funds (Illustrative)

Interpretation: Nearly one-fifth of ECB flows go to areas with weak real-economy impact. Hence, RBI tightened end-use rules.

What Changed in the Regulations

1. Direct End-Use Bans

Now, borrowed funds cannot be used for:

• Chit funds and Nidhi companies
• Real estate business and farmhouses (except limited project cases)
• Trading in TDRs
• Securities transactions (except for some corporate actions)
• Certain agriculture and plantation activities
• Repayment of specified domestic INR loans
• On-lending for banned purposes

Earlier, such limits mainly came through circulars. Now, they are written into law.

2. Rebuilt ECB Framework

At the same time, Schedule I has been fully replaced. It now clearly sets out:

• Who can borrow
• Who can lend (including IFSC institutions)
• Permitted currencies
• Borrowing limits
• Minimum average maturity
• Cost rules
• Security and guarantees
• Refinancing and conversion options
• Reporting timelines

As a result, compliance becomes clearer but also stricter.

3. Stronger Reporting and Bank Oversight

In addition, borrowers must file:

• ECB-1 for registration
• Revised ECB-1 for changes
• ECB-2 for drawdowns and repayments

Moreover, designated AD Category-I banks must monitor transactions on an ongoing basis. Consequently, weak-governance borrowers will find it harder to stay compliant.

4. Family Loans from NRI/OCI Relatives Clarified

Likewise, residents may borrow INR from NRI/OCI relatives only through inward remittance or specified NRI accounts. In addition, repayment must go to the lender’s NRO account on a non-repatriation basis.

Therefore, informal capital channels are effectively closed.

Strategic Meaning

First, the ECB becomes development finance, not cheap liquidity.
Second, balance-sheet strength becomes central to foreign borrowing.
Third, speculative uses lose access to offshore debt.
Finally, infrastructure and manufacturing gain priority.

ABC Live Editor’s Note

Overall, RBI’s 2026 amendment to the FEMA Borrowing & Lending Regulations marks a quiet but firm shift in India’s capital-account policy. Instead of chasing foreign capital volume, the central bank is now focusing on capital quality.

By doing so, RBI has made it clear that overseas debt must turn into factories, infrastructure, and productive assets — not asset bubbles.

In the long run, this approach should reduce external-debt-driven shocks and make India’s growth path more stable. In short, India is moving from capital liberalisation to capital optimisation.