External Commercial Borrowings

External Commercial Borrowings (ECBs) refer to loans and borrowings made by Indian entities from foreign sources, such as international banks, multilateral financial institutions, foreign equity holders, and other eligible lenders. These borrowings serve as an important source of capital for Indian corporations, enabling access to funds at competitive interest rates compared to domestic borrowing options. The framework for ECBs is regulated by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA), 1999, ensuring that such borrowings align with the country’s macroeconomic stability and external debt management objectives.

Background and Context

The concept of ECBs emerged in India during the economic liberalisation phase of the early 1990s, when the nation sought to attract foreign capital to support infrastructure development and corporate expansion. As domestic savings and investment were insufficient to meet industrial growth targets, policymakers recognised the need to tap international financial markets. The ECB framework thus evolved as a mechanism to provide companies with access to foreign funds while maintaining oversight over the quantum and end-use of such borrowings.
The RBI and the Ministry of Finance jointly monitor and regulate ECB flows, ensuring that they do not exert undue pressure on the balance of payments or the external debt position. The ECB policy is revised periodically to reflect macroeconomic conditions, exchange rate movements, and global financial trends.

Types of External Commercial Borrowings

ECBs can be broadly categorised based on the nature of the instrument and maturity profile:

• Foreign Currency-Denominated ECBs: Loans raised in major international currencies such as the US Dollar, Euro, Yen, or Pound Sterling.
• Indian Rupee-Denominated ECBs (Masala Bonds): Bonds issued in the offshore market but denominated in Indian rupees, shifting the exchange rate risk to the investor rather than the borrower.
• Track I: Medium-term foreign currency borrowings with a minimum average maturity of 3–5 years, typically for capital expenditure.
• Track II: Long-term foreign currency borrowings with a minimum maturity of 10 years, suitable for infrastructure and capital-intensive sectors.
• Track III: Rupee-denominated borrowings, including Masala Bonds, with more flexible end-use provisions.

Eligible Borrowers and Lenders

Eligible Borrowers include:

• Companies registered under the Companies Act, 2013
• Infrastructure and manufacturing firms
• Non-Banking Financial Companies (NBFCs)
• Microfinance institutions and non-governmental organisations engaged in microfinance activities
• Port trusts, units in Special Economic Zones (SEZs), and certain educational or hospital institutions

Eligible Lenders encompass:

• International banks and capital markets
• Export credit agencies
• Multilateral and regional financial institutions
• Foreign equity holders with minimum shareholding as prescribed by RBI regulations

End-Use and Restrictions

The end-use of ECB funds is subject to RBI guidelines. Permissible uses generally include:

• Import of capital goods
• Modernisation or expansion of existing production facilities
• Infrastructure projects such as roads, power, telecom, ports, and airports
• Refinancing of existing ECBs under specific conditions

However, prohibited uses include:

• Real estate or land acquisition (except for affordable housing projects)
• Investment in the capital market or equity shares
• On-lending for speculative purposes
• Working capital or general corporate purposes, unless specifically allowed under Track III

Advantages of External Commercial Borrowings

1. Cost Efficiency: ECBs often carry lower interest rates compared to domestic loans, especially when global interest rates are low.
2. Access to Large Capital Pools: Enables companies to fund large-scale infrastructure or industrial projects.
3. Currency Diversification: Provides exposure to multiple currencies, which may benefit firms with foreign revenue streams.
4. Development of International Financial Linkages: Facilitates integration with global financial systems and markets.
5. Extended Maturity Periods: Offers longer repayment schedules, aligning with project lifecycles.

Risks and Challenges

While ECBs offer financial advantages, they also pose several macroeconomic and corporate risks:

• Exchange Rate Risk: Fluctuations in foreign currency can increase repayment costs in rupee terms.
• External Debt Vulnerability: Excessive reliance on ECBs may raise the country’s external debt burden, affecting credit ratings and investor confidence.
• Refinancing Risk: Short-term or unhedged borrowings can lead to liquidity pressures during adverse market conditions.
• Regulatory and Compliance Issues: Non-adherence to RBI guidelines can result in penalties and restrictions on future borrowings.
• Interest Rate Fluctuations: Changes in global benchmark rates, such as LIBOR or SOFR, affect borrowing costs.

ECB Policy Framework and Regulation

The RBI has established a comprehensive policy framework governing ECBs, focusing on transparency, monitoring, and prudent external debt management. Key regulatory features include:

• Automatic Route: Borrowings that meet all specified parameters (such as maturity, lender eligibility, and end-use) do not require prior RBI approval.
• Approval Route: Borrowings falling outside automatic limits require explicit permission from the RBI.
• All-in-Cost Ceiling: The maximum permissible interest rate, including fees and expenses, is determined as a spread over benchmark rates.
• Hedging Requirements: Borrowers are advised or mandated to hedge their currency and interest rate exposures, depending on sector and maturity.
• Reporting Mechanism: Borrowers must report ECB transactions through the ECB Master Directions and file returns such as Form ECB within stipulated timelines.

Trends and Developments

In recent years, India has witnessed a surge in ECB inflows, particularly after the liberalisation measures introduced by the RBI in 2019. The relaxation of sectoral restrictions, higher borrowing limits, and inclusion of start-ups and NBFCs under eligible categories have contributed to this rise. Additionally, the transition from LIBOR to SOFR (Secured Overnight Financing Rate) has altered benchmark calculations for ECBs globally.
The issuance of Masala Bonds has also gained prominence, enabling Indian firms to attract foreign investment without bearing currency risk. During periods of domestic liquidity tightening, ECBs have acted as a supplementary funding source, particularly for infrastructure and manufacturing sectors.

Economic Significance

ECBs play a vital role in India’s financial architecture, supplementing domestic credit and facilitating industrial and infrastructural expansion. They help bridge the savings-investment gap, support innovation, and enhance competitiveness by allowing access to global capital markets. However, prudent management of these borrowings remains crucial to maintaining external sector stability and avoiding excessive foreign debt accumulation.