What is external commercial borrowing?

External Commercial Borrowing (ECB) refers to the borrowing of funds by a country’s domestic companies or government from overseas sources such as international financial institutions, commercial banks, and investors. These funds are obtained in the form of loans, debt securities, or any other form of debt instruments. ECB plays a crucial role in facilitating economic growth and development by providing additional capital to meet funding requirements.

FAQs:

1. What is the purpose of External Commercial Borrowing?

External Commercial Borrowing is primarily done to bridge the gap between domestic savings and investments, leading to increased investment and economic growth.

2. Who can avail of External Commercial Borrowing?

Both Indian companies involved in various sectors such as infrastructure, manufacturing, and services, and the government can avail of External Commercial Borrowing.

3. What are the eligible borrowers for External Commercial Borrowing?

Eligible borrowers for External Commercial Borrowing include public sector undertakings, private sector companies, and financial institutions.

4. What are the permissible end-uses of External Commercial Borrowing?

Permissible end-uses of External Commercial Borrowing include financing capital expenditure, import of capital goods, working capital requirements, and repayment of foreign currency loans.

5. What is the role of the Reserve Bank of India in External Commercial Borrowing?

The Reserve Bank of India regulates and oversees all aspects related to External Commercial Borrowing, such as policy formulation, approval, monitoring, and reporting.

6. What are the different routes for External Commercial Borrowing?

The different routes for External Commercial Borrowing are automatic route and approval route. Under the automatic route, borrowers can directly avail of funds without seeking prior approval, subject to certain conditions. However, for borrowing through the approval route, specific approval from the Reserve Bank of India is required.

7. Are there any limitations on the amount of External Commercial Borrowing?

Yes, there are certain limits on the amount of External Commercial Borrowing that can be availed. These limits are set by the Reserve Bank of India based on factors like the borrower’s track record, project viability, and industry sector.

8. Are there any restrictions on the currency of External Commercial Borrowing?

External Commercial Borrowing can be availed in any freely convertible foreign currency, subject to the guidelines issued by the Reserve Bank of India.

9. What are the repayment terms for External Commercial Borrowing?

External Commercial Borrowing generally follows a predetermined repayment schedule, including interest payments, often aligned with the borrower’s cash flow and project timelines.

10. How does External Commercial Borrowing impact exchange rates?

External Commercial Borrowing can influence exchange rates as it increases the demand for foreign currency. However, the impact is subject to various factors such as market conditions, capital flows, and government policies.

11. Are there any risks associated with External Commercial Borrowing?

Yes, there are risks associated with External Commercial Borrowing, including exchange rate risk, interest rate risk, and refinancing risk, which need to be carefully managed by borrowers.

12. How does External Commercial Borrowing impact the domestic economy?

External Commercial Borrowing can have both positive and negative impacts on the domestic economy. It provides access to additional funds for investment, but excessive borrowing can lead to increased debt burden and vulnerability to economic shocks.

In conclusion, External Commercial Borrowing plays a significant role in meeting the funding requirements of companies and governments. It provides additional capital for investment, fosters economic growth, and allows access to foreign currency resources. However, it is crucial for borrowers to carefully evaluate the terms and conditions, monitor risks, and comply with the regulations set by the Reserve Bank of India to ensure sustainable and efficient borrowing.

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