External Commercial Borrowings

Introduction

• External Commercial Borrowing (ECB) is an instrument used to facilitate Indian companies or big corporations to raise money outside the country in foreign currency.  
• External Commercial Borrowing is fundamentally a loan availed by an Indian company from a non-resident foreign lender. 
• Most of the ECBs are raised by companies through foreign commercial banks and other institutions. 
• Indian corporations can raise money via ECB for expansion of existing capacity as well as for fresh investments.

Routes of ECB

• Automatic route: If a company passes all the prescribed norms specified by the government, it can raise money without any prior approval. 
• Approval route: For specific sectors, the borrowers have to take the permission of the government before borrowing through ECB.

Advantages of ECB

• ECB provides an opportunity to borrow a large volume of funds for the long term.  
• The cost of funds is usually cheaper if borrowed from economies with a lower rate of interest. 
• ECB allows the borrower to diversify the investor base.

Disadvantages of ECB

• The facility of external commercial borrowings  could lead to companies borrowing recklessly, resulting in higher debt on the company’s balance sheet and a negative impact on financial ratios.
• Rating agencies view companies with more debt on their balance sheets negatively, which could result in a market downgrade for such companies.
• Because funds are raised through External Commercial Borrowing in foreign currencies, the principal and interest must also be paid in foreign currencies. As a result, the company exposes itself to the risks associated with currency exchange rates.

Important Points

• External commercial borrowings typically have a three-year minimum maturity length.
• The Department of Economic Affairs of the Ministry of Finance, in collaboration with the Reserve Bank of India, supervises and regulates ECB guidelines and regulations.
• Commercial borrowings account for the largest majority of India’s external debt.
• The majority of the external debt is still denominated in US dollars.