External Commercial Borrowing
The External Commercial Borrowings or ECB’s is the financial instrument that facilitates access to foreign currencies from foreign or non-resident sources by Indian corporations. In other words, External Commercial Borrowings is basically a loan from a non-resident entity to invest in the commercial activities of the domestic country. The ECB’s are an external source of finance that greases the wheels of economic growth.
The External Commercial Borrowings include commercial bank loans, supplier’s credit, buyer’s credit, floating rate notes, fixed rate bonds etc. In the face of a deficit in domestic capital, the Government of India was compelled to look for other ways of investment in order to increase the capital flow. The government encourages Indian corporations to take loans from foreign entities in foreign currency to increase the existing capacity.
The Government of India welcomes investments in core sectors that will directly result in the economic development of the country like railways, roads, coal, telecom, infrastructure, etc. However, funding through External commercial Borrowings in India cannot be used in stock market or any other speculation business. The department of economic affairs, finance ministry, government of India and the Reserve Bank of India regulates the policies of ECB’s and keeps a check on any such undertakings.
ROUTES FOR EXTERNAL COMMERCIAL BORROWING
- The Automatic Route
Under the Automatic route, the Government of India has set eligibility norms with respect to industry type, amount, end-use, etc. In order to raise money without any prior approval, the company must pass through the prescribed norms.
- The Approval Route
For pre-specified sectors, in order to raise money through ECB’s, the borrowers have to take explicit permission of the Government of India and Reserve Bank of India.
ADVANTAGES OF EXTERNAL COMMERCIAL BORROWING’S IN INDIA
- The interest rates are generally lower when borrowing through external sources compared to domestic funds.
- Large sums can be borrowed through foreign external commercial borrowings.
- Since external commercial borrowings are in the form of foreign currencies, Indian corporations will have foreign currency to meet the import of machineries, etc.
- This gives the borrower an opportunity to diversify the investor base.
- The government can regulate the amount that goes into different sectors. This facilitates economic development as the government can direct inflows into sectors having more growth potential.
There are certain restrictions pertaining to the amount and maturity of the ECB’s. External commercial borrowings of over $20 million are required to have a minimum average maturity of 5 years and the borrowings below $20 million are imposed with the minimum average maturity of 3 years.