RBI's proposal on ECB likely to give realty sector a funding boost

Proposal allows External Commercial Borrowings for real-estate activities where FDI is permitted

If, in terms of a central-bank proposal, real-estate activities in which foreign direct investment (FDI) is permitted also get the benefit of external commercial borrowing (ECB), it will be a landmark shift — one that could reshape how Indian developers access and manage capital. 

 

By opening the door to offshore debt for construction and development projects, the draft framework is expected to ease long-standing funding constraints, lower borrowing costs, and revive stalled projects in the country.

 

For more than three decades, India’s real estate has remained cut off from external commercial borrowing, primarily due to concern around speculative land dealings and currency risks, say experts. 

 

According to legal experts, the move reflects a fundamental realignment of policy.

 

Hardeep Sachdeva, senior partner at AZB & Partners, said the Reserve Bank of India’s draft framework “represents a significant recalibration of India’s external debt policy”. 

 

“The distinction between the ‘real-estate business’ and ‘construction-development’ is critical,” Sachdeva said.

 

“Under India’s FDI policy, trading in immovable property and land speculation remain prohibited, but 100 per cent FDI is permitted under the automatic route in construction. The draft framework mirrors this boundary, ensuring a flow of offshore money into productive, asset-creating activities rather than speculative land banking.”

 

The move, if implemented, will allow developers to raise offshore debt not just for construction but also for land acquisition directly linked to development projects — something domestic banks are debarred from funding.

 

“Indian banks lend to the sector, but their exposure is carefully limited. Financing for raw land is largely off limits,” Sachdeva said.

 

“ECB could provide a more stable and cheaper alternative for well-rated developers if they manage currency and refinancing risks.”

 

Ketan Mukhija, senior partner at Burgeon Law, said the move could “substantially ease liquidity constraints” by allowing developers to tap overseas capital for land and construction. 

 

He pointed out that the RBI’s upcoming 2025 directions would ease provisioning requirements on under-construction loans, lowering it to 1.25 per cent for commercial projects and 1 per cent for residential, making the domestic environment conducive to real-estate financing.

 

“This dual approach — liberalising offshore borrowing and refining domestic lending rules — is set to improve funding access, foster resilience, and drive growth across India’s real estate landscape,” Mukhija added.

 

Domestic banks, constrained by prudential norms to reduce risk exposure, have largely avoided lending for land acquisition, forcing developers to rely on costlier sources like private equity or non-banking financial companies (NBFCs). The new proposal seeks to change that.

 

“This draft policy draws the curtain on restrictions that have been in force for three decades,” said Anuj Puri, chairperson, Anarock group. “It will result in improved access to capital for land acquisition, provide competitive offshore rates, and speed up project launches. Institutional funding has risen by over 120 per cent in recent years, and with this liberalisation move, the sector will have improved access to foreign capital.”

 

Liberalisation addresses developers’ challenges in securing funding from Indian banks, Puri added.

 

“Banks have been cautious about lending to real estate due to high-risk perceptions and concerns about non-performing assets. After the IL&FS defaults, NBFCs too faced liquidity issues. Many developers had to depend on high-cost private equity or faced the risk of bankruptcy. ECB offers a competitive alternative that can rejuvenate stalled projects,” he said.

 

Between 2020 and 2025, India’s real estate attracted nearly $18.4 billion in construction FDI, according to Anarock. With ECB now potentially complementing FDI, the sector could be poised for an even greater inflow of global capital.

 

From a developer’s standpoint, the proposal could be transformative.

 

Pradeep Aggarwal, founder and chairperson of Signature Global (India), called it “a game-changing step” that could enhance liquidity and profitability across the housing sector. “The decision will enable reputed and financially sound developers to access offshore loans at lower costs, improving cash flow and reducing project expenses.”

 

Industry players view the move as a step towards aligning Indian real estate with global financing practices.

 

Manan Shah, managing director, MICL group, said it would “open the door to a wider and more cost-effective pool of capital, reducing overdependence on domestic lenders”.

 

For developers with strong balance sheets, this could mean faster project execution and stronger sectoral growth, he said.

 

Siddharth Vasudevan Moorthy, managing director, Vascon Engineers, said access to offshore funds would help developers diversify funding sources and “bring financial discipline through exposure to global lending standards”.

 

However, experts have cautioned that the benefits of this liberalisation will hinge on prudent risk management. Offshore borrowing exposes developers to currency volatility and refinancing risks, which needs to be hedged.