External Commercial Borrowings
Any money that has been borrowed from foreign sources for financing the commercial activities in India are called External Commercial Borrowings. The Government of India permits ECBs as a source of finance for Indian Corporates for expansion of existing capacity as well as for fresh investment.
The ECBs are defined as money borrowed from foreign resources including the following:
- Commercial bank loans
- Buyers’ credit and suppliers’ credit
- Securitised instruments such as Floating Rate Notes and Fixed Rate Bonds etc.
- Credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.
Objective of ECB
- Government permits the ECBs as an additional source of financing for expanding the existing capacity as well as for fresh investments. The ECB policy of the Government seeks to emphasize the priority of investing in the infrastructure and core sectors such as Power, telecom, Railways, Roads, Urban infrastructure etc.
- There is also emphasis on the need of capital for Small and Medium scale enterprises.
How ECB is different from FDI?
ECB means any kind of funding other than Equity. If the foreign money is used to finance the Equity Capital, it would be termed as Foreign Direct Investment. The ECB should satisfy the ECB regulations stipulated by the Government or its agencies such as RBI. The Bonds, Credit notes, Asset Backed Securities, Mortgage Backed Securities or anything of that nature are included in ECB.
Please note that the following are not included in the ECBs:
- Any Investment made towards core capital of an organization such as equity shares, convertible preference shares or convertible debentures. We should note here that those instruments which can be converted into equity are called convertible. The convertible instruments are covered under the FDI Policy.
- Any other direct capital is not allowed in ECB.
Routes to Access ECB
- External Commercial Borrowing in India can be accessed via two routes viz. Automatic Route and Approval Route.
- General idea is that ECB for investment in industrial sector, infrastructure sector are allowed under Automatic Route. They do not require the approval of the Reserve Bank or the Government of India. For specific sectors such as export and import, the borrower has to take the explicit permission of the government before taking the loan.
Benefits to Borrower
- For corporates, the ECB funding helps in many purposes such as paying to suppliers in other countries etc that may not be available in India.
- The cost of funds borrowed from external sources at times is cheaper than domestic funds.
- The borrower can diversify the investor base.
- It opens the international market for the borrowers. ECBs from internationally recognised sources such as banks, export credit agencies, suppliers of Equipment, foreign collaborators, foreign equity holders, international capital markets etc.
Impact & Implications on Economy
- TheGovernment of India has a controlled policy on ECBs and via its policies, it would like to make companies use the ECB to primarily fund the infrastructure and SME sector of the economy.
- The benefit for the economy is that thelow cost international funds can improve inflow of more money in these sectors. Over the years, Indian companies have increasingly dependent on ECB. Indian companies want to get loans through ECB at lower cost and lower their cost of borrowing.
- TheExternal commercial borrowings increase the external debt of the country. That is why it has to be matched with growth of foreign exchange reserves in the country so as to maintain solvency.
- Also increase in ECB is accompanied with increase in currency risk as there will be depreciation in rupee, which will lead to increased burden on the borrower as the value of the rupee depreciates. Thus, increased dependence on ECB is less favourable for borrowing country’s view. If ECBs are not controlled , there can be huge debt causing problems for economy.
Policy of the Government
- India’s ECB policy seeks to keep an annual cap or ceiling on access to ECB, consistent with prudent debt management. The policy also seeks to give greater priority for projects in the infrastructure and core sectors such as Power, oil Exploration, Telecom, Railways, Roads & Bridges, Ports, Industrial Parks and Urban Infrastructure etc. and the export sector.
- Allowed companies are free to raise ECB from any internationally recognised source such as banks, export credit agencies; suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. offers from unrecognised sources will not be entertained.
- The companies in manufacturing and infrastructure sector and having foreign exchange earnings can avail of external commercial borrowing ( ECB) for repayment of outstanding rupee loans towards capital expenditure and/or fresh Rupee capital expenditure under the approval route. The overall ceiling for such ECBs is $10 billion.
- For infrastructure sector companies, there is an overall ceiling of $ 20 billion. RBI has in September 2012, allowed companies to raise ECB up to a maximum period of 5 years for importing capital goods. Under the new norms, the trade credit should not be for a period of less than 15 months and also not in the nature of short-term roll-over finance.