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.
ECB Vs 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. 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.
- Any other direct capital is not allowed in ECB.
How to access ECB
External Commercial Borrowing in India can be accessed via two routes viz. Automatic Route and Approval Route. Under Automatic Route approval of the Reserve Bank or the Government of India not required.
Benefits to Borrower
- 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.
Effects 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 the low cost international funds can improve inflow of more money in these sectors.
- Indian companies get loans through ECB at lower cost and lower their cost of borrowing and cost of production which increases their competitiveness in international market.
- The External commercial borrowings increase the external debt of the country. Therefore it has to be matched with growth of foreign exchange reserves in the country so as to maintain solvency.
- 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.