External Commercial Borrowings

The RBI has announced revised framework for external commercial borrowings (ECBs). Fewer restrictions on end-uses, higher all-in-cost ceiling for long-term foreign currency borrowings marked the revised policy. The list of overseas lenders has been expanded to include long-term lenders like sovereign wealth funds, pension funds, insurance companies etc.

Minimum average maturity (MAM) of 3 years for small value ECBs is raised to $50 million from the existing $20 million. The revised ECB framework consists of three tracks. Track 1 comprises medium term foreign currency denominated ECB with MAM of 3/5 year, track 2 consists of long term foreign currency denominated ECB with MAM of 10 years and track 3 comprises Rupee-denominated ECB with MAM of 3/5 years.

An external commercial borrowing(ECB) is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs (public sector undertakings). ECBs include commercial bank loans, buyers' credit, suppliers' credit, securitised instruments such as floating rate notes and fixed rate bonds etc.

credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc. ECBs cannot be used for investment in stock market or speculation in real estate.

For infrastructure and greenfield projects, funding up to 50% (through ECB) is allowed. Recently Government of India allowed borrowings in Chinese currency yuan. Corporate sectors can mobilize $750 million via automatic route, whereas service sectors and NGOs for microfinance can mobilise $200 million and $10 million respectively.

Borrowers can use 25 per cent of the ECB to repay rupee debt and the remaining 75 per cent should be used for new projects. A borrower cannot refinance its entire existing rupee loan through ECB. The money raised through ECB is cheaper given near-zero interest rates in the US and Europe, Indian companies can repay part of their existing expensive loans from that.

Business Standard has earlier reported that India Inc’s borrowing by way of External Commercial Borrowings (ECBs) has taken a hit in recent times due to volatility in the rupee on account of global factors. Experts believe these loans may not see pickup even in the next few months due to looming concerns of US Fed’s rate hike. Data from the Reserve bank of India (RBI) shows that ECBs recorded a drop of 32.48 per cent year-on-year (y-o-y) in July 2015 to $2,143 million.