What are external commercial borrowings?

External commercial borrowings (ECBs) refer to the loans in the form of bank loans, buyer’s credit, supplier’s credit, securitized instruments (such as floating rate notes and fixed rate bonds), and commercial borrowings from foreign sources by Indian entities. These borrowings can be utilized for various purposes such as import of capital goods, new projects, working capital requirements, and refinancing of existing debt.

What are the benefits of external commercial borrowings?

External commercial borrowings offer several benefits. They provide access to funds at competitive interest rates, allow diversification of funding sources, offer longer tenures compared to local borrowings, and provide an avenue for raising foreign currency funds.

Who can avail external commercial borrowings?

Indian corporates, banks, and entities from all sectors except for financial intermediaries, non-banking financial companies (NBFCs), and housing finance companies (HFCs) can avail external commercial borrowings.

What are the sources of external commercial borrowings?

The sources of external commercial borrowings include international banks, export credit agencies, international capital markets, multilateral financial institutions, and foreign collaborators.

Are there any limits on external commercial borrowings?

Yes, there are limits and guidelines prescribed by the Reserve Bank of India (RBI) on the maximum amount, maturity period, and end-use restrictions of external commercial borrowings. These limits differ for various sectors and are subject to periodic revisions.

What is the role of the Reserve Bank of India in external commercial borrowings?

The Reserve Bank of India is responsible for regulating and monitoring external commercial borrowings. It formulates policies, issues guidelines, and ensures compliance with the regulatory framework to maintain stability in the Indian financial system.

What are the risks associated with external commercial borrowings?

External commercial borrowings carry risks such as currency risk (due to exchange rate fluctuations), interest rate risk (changes in global interest rates), and refinancing risk (ability to repay borrowings at maturity). These risks need to be managed effectively to avoid any adverse impact on the borrower.

Can external commercial borrowings be prepaid?

Yes, external commercial borrowings can be prepaid subject to the applicable guidelines and regulations. Prepayment enables borrowers to reduce their debt burden, save on interest costs, and realign their debt profile.

Can external commercial borrowings be converted into equity?

Yes, external commercial borrowings can be converted into equity subject to the applicable guidelines and regulations. Such conversions may be allowed as part of restructuring or resolution processes to facilitate the revival of stressed entities.

How are external commercial borrowings regulated?

External commercial borrowings are regulated by the Reserve Bank of India under the Foreign Exchange Management Act (FEMA). The RBI formulates policies, issues regulations, and monitors compliance to ensure the stability of the Indian financial system.

What is the current framework for external commercial borrowings?

The current framework for external commercial borrowings was revised by the Reserve Bank of India in 2019. It incorporates various changes to liberalize the framework, improve ease of doing business, and enhance the flow of external funds into the Indian economy.

Can external commercial borrowings be used for speculative purposes?

No, external commercial borrowings cannot be utilized for speculative purposes such as real estate activities, investing in capital markets, or acquiring shares (except for strategic investments in specific sectors). The end-use of the funds should be productive and aligned with the permitted activities.

Are external commercial borrowings subject to reporting requirements?

Yes, entities availing external commercial borrowings are required to comply with reporting requirements imposed by the Reserve Bank of India. This includes submission of periodic reports, certificates, and information related to the utilization and repayment of borrowings.

What are the potential benefits of external commercial borrowings for the Indian economy?

External commercial borrowings can play a vital role in meeting the financing requirements of Indian entities, promoting economic growth, enhancing competitiveness, and attracting foreign investments. They contribute to infrastructure development, technology transfer, and job creation, thereby supporting overall economic development.

In conclusion, external commercial borrowings provide Indian entities with an avenue to access funds from foreign sources. While offering various benefits, they also carry certain risks that need to be managed effectively. The regulatory framework ensures the proper functioning of external commercial borrowings, contributing to the growth and stability of the Indian economy.

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