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Current Affairs 2023
External commercial borrowing (ECB) refers to loans in foreign currency made by non-resident lenders to Indian borrowers. These loans are used to provide Indian corporations and public sector undertakings with access to foreign funds. ECBs include various forms of debt such as commercial bank loans, securitized instruments, and credit from official export credit agencies. The Department of Economic Affairs and Reserve Bank of India regulate ECB guidelines and policies.
Apr 07, 2023
2 min read
External Commercial Borrowing (ECB) refers to loans made by non-resident lenders in foreign currency to Indian borrowers. ECBs are widely used in India to facilitate access to foreign funds by Indian corporations and public sector undertakings (PSUs). These borrowings are in the form of commercial bank loans, securitized instruments, credit from export credit agencies, and more. The Department of Economic Affairs, Ministry of Finance, along with the Reserve Bank of India, regulates and monitors ECB guidelines and policies.
Most of these loans are provided by foreign commercial banks and other institutions. ECBs have contributed between 20 and 35 percent of the total capital flows into India. Indian corporations and PSUs have used ECBs as a source of investment. ECBs can be used for infrastructure and greenfield projects, and up to 50% of the funding for these projects is allowed through ECBs.
Recently, the Reserve Bank of India raised the ECB limit for non-banking finance companies classified as infrastructure finance companies from 50% to 75% of owned funds, including outstanding ECBs. The telecom sector also allows up to 50% funding through ECBs. Moreover, the government of India has allowed borrowing in the Chinese currency yuan.
Borrowers can use 25% of the ECB to repay rupee debt, and the remaining 75% should be used for new projects. A borrower cannot refinance its entire existing rupee loan through ECB. Companies can repay part of their existing expensive loans using funds raised through ECBs, given the near-zero interest rates in the US and Europe.
ECB transactions are governed by the Foreign Exchange Management Act, 1999. ECBs can be raised through the automatic route or approval route. Under the automatic route, cases are examined by AD Category-I Banks, whereas under the approval route, borrowers send their requests to the Reserve Bank of India through their AD banks for examination. ECBs can be raised only for a specific period called the Minimum Average Maturity Period (MAMP).
ECBs are an essential tool for Indian corporations and PSUs to access foreign funds. However, they also pose significant risks, such as currency fluctuations, that borrowers should consider. Therefore, ECBs should be used judiciously to prevent over-reliance on foreign funds and manage financial risks.
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