11 July, 2020
8 Min Read
External Commercial Borrowings
External commercial borrowing (ECBs) are loans made by non-resident lenders in foreign currency to Indian borrowers. They are used widely in India to facilitate access to foreign money by Indian corporations and PSUs (public sector undertakings).
The debtors can be the government, corporations or citizens of that country. The debt includes money owed to private commercial banks, foreign governments, or international financial institutions such as IMF and World Bank. For telecom sector, infrastructure and Greenfield projects, funding up to 50% (through ECB) is allowed.
Recently, RBI issued a guideline stating that all eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under the automatic route (earlier it was applicable only to corporate companies). The Department of Economic Affairs, Ministry of Finance, along with RBI, monitors and regulates ECB guidelines and policies. U.S. dollar-denominated debt remains largest component of the external debt.
The Sahoo Committee report on ECB
· The Sahoo Committee was set up in 2013, to develop a framework for access to domestic and overseas capital markets.
· The Committee made an assessment of the currency risk by Indian firms undertaking ECB.
· The Committee noted that the possibility of market failure can be ameliorated, by requiring firms that borrow in foreign currency to hedge their exchange risk exposure.
· The present complex array of controls on foreign currency borrowing should be done away with.
· The Indian domestic rupee debt market is a viable alternative to foreign borrowing for financing Indian firms and does not entail any market failure. · The policy should aim at removal of all impediments to the development of the domestic rupee debt market.
Change in ECB norms:
Advantage of ECBs:
· The growing importance of ECBs in the composition of external debt is a cause of concern for the Indian economy. Availability of funds at a cheaper rate may bring in lax attitude on the company’s side resulting in excessive borrowing.
· This eventually results in higher debt on the balance sheet which may affect many financial ratios adversely.
· Higher debt on the company’s balance sheet is usually viewed negatively by the rating agencies.
· This may result in a possible downgrade by rating agencies which eventually might increase the cost of debt.
· Effect on earnings due to interest expense payments.
· Since the repayment of the principal and the interest needs to be made in foreign currency, It exposes the company to interest and currency fluctuations.
· Companies may have to incur hedging costs or assume exchange rate risk which if goes against may end up negative for the borrowers.
Is it Enough?
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