The Reserve Bank of India (RBI) recently said that agreements for external commercial borrowings (ECBs) signed by Corporate India jumped to a massive $12 billion in the April-June quarter of 2023, three times the level in the year-ago period.
About External Commercial Borrowings (ECBs)
- ECBs refer to the borrowing of funds by Indian companies from foreign sources in the form of loans, bonds, or other financial instruments.
- Purpose: It can be used to finance a variety of purposes, including the expansion of business, the acquisition of assets, and the repayment of existing debt.
- Source of ECBs: ECB can be obtained from a variety of sources, including foreign banks, international financial institutions, and foreign subsidiaries of Indian companies.
- ECB can be in the form of rupee-denominated loans, which are repaid in Indian rupees, or foreign currency-denominated loans, which are repaid in a foreign currency.
- Regulation: ECB is subject to regulatory oversight by the RBI, which sets limits on the amount of ECB that Indian companies can obtain and the purposes for which it can be used.
- Companies must also meet certain eligibility criteria in order to access ECB, such as minimum credit ratings and debt-equity ratios.
Benefits of External Commercial Borrowings
- ECBs provide an opportunity to borrow large volumes of funds.
- The funds are available for a relatively long term.
- Interest rates 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.
Risks with External Commercial Borrowings
- Exchange rate risk: Fluctuations in the value of the Indian rupee against foreign currencies can affect the cost of repaying the loan.
- Sovereign risk: ECB exposes companies to sovereign risk, as the ability of a foreign government to repay its debt can affect the creditworthiness of foreign lenders. If a foreign government defaults on its debt, it could have a negative impact on the ability of foreign lenders to repay their loans to Indian companies.
- Credit risk: ECB exposes companies to credit risk, as foreign lenders may not have the same level of protection as domestic lenders in the event of default.
- Regulatory risk: ECB is subject to regulatory risk, as changes to government regulations or policies related to ECB can affect the availability and cost of borrowing.
Q1) What is a Bond?
Bond is a fixed-income instrument that represents a loan from an investor to a borrower. It is a contract between the investor and the borrower, where the borrower uses the money to fund its operation and the investors receive interest on the investment. Bonds are high-security debt instruments that fall under the fixed income asset class. It enables an entity to raise funds to fulfill the capital requirement for funding various projects. It is a debt that borrower’s avail from individuals for a specified tenure.