More often than not, people are required to borrow capital in order to kick start a business or widen the horizons of an existing one. At some point or the other, people have to consider borrowing money. More people are looking towards foreign loans as an option for funding?
The reason they are looking beyond border lines is because of the possibility of borrowing money at a cheaper interest rate. Yes, you can borrow money at a much cheaper interest rate from a foreign lender, almost half the interest sometimes as compared to borrowing from domestic lenders. On comparing interest rates of developed nations and India, you can easily infer how profitable borrowing money from, say, Japan, the United States of America or EU can be for an Indian business.
The only glitch you may face while borrowing money from a foreign lender is the heavy guidelines and regulations set by the Government of India on commercial borrowings. These regulations are mainly administered by the Reserve Bank of India (RBI). Loans from a foreign entity are called External Commercial Borrowings.
External Commercial Borrowings or ECB are commercial loans in the form of buyer’s credit, bank loans, supplier’s credit, floating-rate notes, and fixed-rate bonds, non-convertible, optionally convertible or partially convertible from non-resident lenders.
Just like a foreign direct investment, external commercial borrowings can be accessed through two routes: the automatic route and the approval or the government route.
- Automatic Route: Under the automatic route, the borrower can get a loan from a foreign entity without prior approval from the Reserve Bank of India. However, here the loan agreement has to be registered with the RBI.
2. Approval Route: Under the approval route, in order to get a loan from a foreign entity, the borrower is required to submit an application with the RBI in the prescribed form through an authorized dealer as specified by the RBI.