Recently, Reserve Bank of India i.e. RBI informed that the External Commercial Borrowing agreements signed by Corporate India have reached $12 billion in the April-June quarter. This is thrice the level of the year-ago period while it is 80% of the inflow during the last financial year.
What is External Commercial Borrowings (ECB) ?
It is a loan taken by an Indian entity from a non-resident lender with a minimum average maturity. Under this, most of the loans are provided by securitized instruments like credit of suppliers of buyers’ credit, protein rates, notes and fixed rate bonds etc. of foreign commercial banks. It can be used to finance a variety of purposes, including business expansion, acquisition of assets and repayment of existing loans. The same can be obtained from various sources including foreign banks and international financial institutions as well as overseas subsidiaries of Indian companies.
Ways to reach ECB
ECB can be obtained in two ways –
first automatic route – Under this route, the government has set up eligibility criteria, which govern the amount industry and the end use of the funds, for those wishing to use ECB. Borrowers can access the funds after meeting the criteria without the need for explicit authorization from the RBI or the government.
second permission route – This route involves obtaining explicit approval from the RBI or the government before accessing funds through ECB. Borrowers have to obtain specific permission before proceeding with the borrowing process.
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| RBI | Click |
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Benefits of ECB
They provide an opportunity to borrow large amounts of money. Its funds are available for a relatively longer period. Its interest rates are lower as compared to domestic funds. These are in the form of foreign exchange, so they enable the corporate to hold foreign exchange to meet imports of machinery, etc. Corporates can raise ECB from internationally recognized sources such as banks, export credit agencies, international capital markets etc.
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Risks of ECB
- exchange rate risk – Fluctuations in the value of the Indian Rupee against foreign currency OK may affect the cost of loan repayment.
- second sovereign risk – ECBs expose companies to sovereign risk because a foreign government’s ability to repay its debt can affect the creditworthiness of foreign lenders. In fact, if a foreign government defaults on its loan, it can have a negative impact on the ability of foreign donors to repay loans to Indian companies.
- credit exposure – This exposes companies to credit risk because foreign borrowers may not have the same level of protection as domestic lenders in the event of a default.
- regulatory risk – ECBs are subject to regulatory risk as changes in relevant government regulations or policies may affect the availability and cost of borrowing.