RBI Notifications

Surge in Indian Companies’ External Commercial Borrowings (ECBs)

Prelims Only | Economics | Mains Paper 3: Indian Economy
Note4Students

From UPSC perspective, the following things are important :

Prelims level: External Commercial Borrowings (ECBs)

Why in the News?

Indian companies “external commercial borrowings” nearly doubled in FY24, reaching $49.2 billion, according to RBI data.

Key Statistics:

  • Disbursements: ECB disbursements stood at $38.4 billion in FY24, a significant increase from $23.8 billion in FY23, underscoring the growing reliance on overseas markets for funding.
  • Domestic Pressure: High interest rates in the domestic system have led to increased pressure, prompting companies to explore ECBs as a viable funding alternative.

External Commercial Borrowing (ECBs) in India:

Details
Definition Loans provided by non-resident lenders in foreign currency to Indian borrowers.
Usage Widely used by Indian corporations and PSUs to access foreign funds.
Instruments Covered Commercial bank loans, buyers’ credit, suppliers’ credit, securitised instruments (floating rate notes, fixed-rate bonds), credit from official export credit agencies, and commercial borrowings from multilateral financial institutions.
Regulation Monitored and regulated by the Department of Economic Affairs (DEA) under the Ministry of Finance, Government of India, along with the Reserve Bank of India.
Contribution Contributed between 20 and 35% of total capital flows into India in 2012.
Recent Changes RBI raised ECB limit for infrastructure finance companies from 50% to 75% of owned funds.
Guideline Changes RBI allowed all eligible borrowers to raise ECB up to USD 750 million per financial year under the automatic route (2019).
Utilisation of Funds 25% of ECB can be used to repay rupee debt; 75% should be allocated for new projects.
Regulatory Framework Governed by the Foreign Exchange Management Act, 1999.
Routes for Raising ECBs Automatic Route and Approval Route.

  1. Automatic Route: Cases examined by AD (Authorized Dealer) Category-I Banks.
  2. Approval Route: Borrowers submit requests to RBI through their AD banks for examination.
Maturity Period ECBs can only be raised for a specific period known as the Minimum Average Maturity Period (MAMP).
Advantages Offered
  • ECBs offer the opportunity to secure substantial funding.
  • These funds typically come with longer-term repayment options.
  • Interest rates on ECBs are generally lower compared to domestic borrowing rates.
  • ECBs are denominated in foreign currencies, providing corporations with access to foreign currency to fulfil import needs such as machinery procurement.

 

PYQ:

[2019] Consider the following statements :

  1. Most of India’s external debt is owed by governmental entities.
  2. All of India’s external debt is denominated in US dollars.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

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