EXTERNAL COMMERCIAL BORROWINGS
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The document discusses External Commercial Borrowings (ECBs), which are loans from non-resident lenders to Indian entities aimed at raising funds in foreign currencies for business expansion. It outlines the routes for obtaining ECBs, eligible borrowers and lenders, the parameters governing these loans, and the advantages and disadvantages of ECBs. While ECBs can provide cheaper and larger funds, they pose risks such as increased debt on balance sheets and exposure to exchange rate fluctuations.
EXTERNAL COMMERCIAL BORROWINGS
- 1. PRESENTED BY, NAVYA JAYAKUMAR P ROLL NO: 20
- 2. CONTENT EXTERNAL COMMERCIAL BORROWINGS ROUTES FOR ECB ELIGIBLE BORROWER UNDER ECB GUIDELINES ELIGIBLE LENDERS UNDER ECB PARAMETERS OF ECBS ADVANTAGES OF ECBS DISADVANTAGES OF ECBS CONCLUSION
- 3. EXTERNAL COMMERCIAL BORROWINGS • ECB is basically a loan availed by an Indian entity from a nonresident lender • Most of these loans are provided by foreign commercial banks and other institutions • It refers to commercial loans availed from non-resident lenders with a minimum average maturity of 3 years • An external commercial borrowing (ECB) is an instrument used in India to facilitate Indian companies to raise money outside the country in foreign currency. The government of India permits Indian corporates to raise money via ECB for expansion of existing capacity as well as for fresh investments.
- 4. ROUTES FOR ECB ECB can be availed by either Automatic Route or by Approval Route. 1. ECB through Automatic Route: No Prior RBI Approval Under automatic route, the government has permitted some eligibility norms with respect to industry, amounts, end-use etc. If a company passes all the prescribed norms, it can raise money without any prior approval. 2. ECB through Approval Route: Prior RBI Approval Needed Under the approval route, the prospective borrowers are required to send their requests to the Reserve Bank through their Authorized Dealer (AD) Banks for examination. (Authorized dealer: Means a person authorized as an authorized dealer under subsection (1) of section 10 of the Foreign Exchange Management Act, 1999)
- 5. ELIGIBLE BORROWER UNDER ECB GUIDELINES • Port Trusts; • Units in SEZ; • SIDBI; • EXIM Bank; and • Registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/cooperatives and Non Government Organizations (permitted only to raise INR ECB).
- 6. ELIGIBLE LENDERS UNDER ECB • International banks • International capital markets • Multilateral financial institutions (such as IFC, ADB, CDC, etc.) • Export credit agencies • Suppliers’ of equipment • Foreign collaborators • Foreign equity holders (other than erstwhile OCB)
- 7. PARAMETERS OF ECBS • Currency of borrowing : Any freely convertible Foreign Currency 1. Loans including bank loans; 2. floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments) 3. Trade credits beyond 3 years 4. FCCBs 5. FCEBs 6. Financial Lease. • Currency of borrowing : Indian Rupee (INR) 1. Loans including bank loans; 2. Floating/ fixed rate notes/ bonds/ debentures/ preference shares (other than fully and compulsorily convertible instruments); 3. Trade credits beyond 3 years; 4. Financial Lease 5. Rupee denominated bonds issued overseas (RDBs), which can be either placed privately or listed on exchanges as per host country regulations.
- 8. ADVANTAGES OF ECBS • ECBs provide opportunity to borrow large volume of funds • The funds are available for relatively long term • Interest rate are also lower compared to domestic funds • ECBs are in the form of foreign currencies. Hence, they enable the corporate to have foreign currency to meet the import of machineries etc. • Corporate can raise ECBs from internationally recognized sources such as banks, export credit agencies, international capital markets etc.
- 9. DISADVANTAGES OF ECB • 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 which may result in a possible downgrade by rating agencies which eventually might increase the cost of debt. This may also tarnish the company’s image in the market and market value of the shares too in eventual times. • Since the borrowing is foreign currency denominated, the repayment of the principal and the interest needs to be made in foreign currency and hence exposes the company to exchange rate risk.
- 10. CONCLUSION Though external commercial borrowings come at lower costs, it comes with various restriction and guidelines that need to be followed. There exists restriction on the amount and maturity of the ECB. ECBS above $ 20 million need to be of minimum average maturity of 5 years and below $ 20 million should have a minimum average maturity of 3 years. There are restrictions with regards to end use of the funds too. The companies may use it for expansion, but they cannot use it for onward lending, real estate investments, repayment of existing loans and many such limitations. ECBs are one of the commonly availed sources of cheaper funds by eligible companies. However, the companies need to be cautious about the exchange rate risk and impact on balance sheet debt to use it effectively.