External Commercial Borrowing (ECB)

Subject: Economy

Context: ECB as cheap source of borrowing needs to be availed with caution said RBI director.

Concept:

It is a commercial loan raised by an eligible resident entity from recognised non-resident entities.
These foreign sources could be:

Commercial bank loans
Buyers’ credit and 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.

Commercial borrowings account for the largest component of India’s external debt.

Why ECB?

With interest rates in the US and Euro Zone currently being markedly lower than domestic rates, a corporate can save on its financing costs by taking recourse to ECB even after it takes into account associated costs such as hedging, guarantee fees and other transaction costs.
The six-month London Interbank Offered Rate (LIBOR) or any other six-month interbank interest rate applicable to a currency of borrowing such as Euro Interbank Offered Rate is the benchmark rate for ECBs in foreign currencies.
In India it is allowed for expansion of existing capacity as well as for fresh investment.
ECB is the considered best solution to push productive lending without implications for price rise (as pushing liquidity involves risk of inflatioon)
ECB is different from FDI as ECB means any kind of funding other than Equity which comes under FDI

Concerns with ECB

Borrowers’ skill to use it to their advantage is a must for such instruments
Exchange rate risk involved in servicing the debt
Hedging off ECB is must and involves costs and this option may not be always available
Higher magnitude of foreign debt could lead to rupee appreciation and reduction in the competitiveness of our exports