External commercial borrowing (ECBs) are
loans in India 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). 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
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...
or speculation in
real estate. The DEA (Department of Economic Affairs), Ministry of Finance,
Government of India along with
Reserve Bank of India, monitors and regulates ECB guidelines and policies.
Most of these loans are provided by foreign
commercial banks and other institutions. During the 2012, contribution of ECBs was between 20 and 35 percent of the total capital flows into India. Large number of Indian corporate and PSUs have used the ECBs as sources of investment.
For infrastructure and greenfield projects, funding up to 50% (through ECB) is allowed. According to a report in ''
The Hindu
''The Hindu'' is an Indian English-language daily newspaper owned by The Hindu Group, headquartered in Chennai, Tamil Nadu. It began as a weekly in 1878 and became a daily in 1889. It is one of the Indian newspapers of record and the secon ...
'' in January 2013, the Reserve Bank of India raised the ECB limit "for non-banking finance companies (NBFCs) classified as infrastructure finance companies (IFCs) ... from 50 per cent to 75 per cent of owned funds, including outstanding ECBs". In telecom sector too, up to 50% funding through ECBs is allowed. Recently Government of India allowed borrowings in Chinese currency yuan. Earlier, corporate sectors could mobilize $750 million via automatic route, whereas service sectors and NGO's for microfinance could mobilize $200 million and $10 million respectively. More 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.
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 can not 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.
Transactions on ECB are governed by Foreign Exchange Management Act,1999. ECB can be raised through Automatic Route or Approval Route.
Under Automatic Route, the cases are examined by the AD Category-I Banks.
Whereas under 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 Minimum Average Maturity Period (MAMP).
References
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Finance in India
Capital markets of India
Debt