External Commercial Borrowings

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.

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.

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.

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.

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.