India has always promoted capital inflows as a part of the development policy. Lack of domestic capital and deficit in the current account compelled the government historically to go after foreign capital. In simple terms, foreign capital is money obtained from foreign countries to make investment domestically.
Foreign capital is not homogenous as there are different types of foreign capital. The major category is foreign investment including FDI (Foreign Direct Investment) and FPI (Foreign Portfolio Investment). Similarly, there are other types of foreign capital like trade credit, NRI Deposits and the most important one for India – the External Commercial Borrowings (ECBs).
What is 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 is a loan availed of from non-resident lenders with a minimum average maturity of 3 years.
The significance of ECBs their size in India’s balance of payment account. In the post reform period, ECBs have emerged a major form of foreign capital like FDI and FII.
During several years, contribution of ECBs was between 20 to 35 percent of the total capital flows into the country. Large number of Indian corporate and PSUs have used the ECBs as sources of investment.
Bulk of the overseas loans or ECBs into the country are obtained by private sector corporates. For the corporate, ECB is a dependable and easy to obtain fund and helps them to make business/investment expansion.
External Commercial Borrowings (ECBs) includes commercial bank loans, buyers' credit, suppliers' credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc., credit from official export credit agencies and commercial borrowings from Multilateral Financial Institutions. ECBs are being permitted by the Government as a source of finance for Indian Corporate for expansion of existing capacity as well as for fresh investment. Following are the advantages of ECBs.
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 recognised sources such as banks, export credit agencies, international capital markets etc.
Unlike many other emerging market economies, India has a vibrant corporate sector at home. Many of them have overseas operations as well. The domestic financial market is not often able to provide big sized loans at competitive rate of interests to the corporate. Here, External Commercial Borrowings have emerged as a valuable source of investable resource of funds for domestic companies.
The government follows a well-designed ECB policy-putting restrictions on amount of loan that can be obtained by a company, end user restrictions, interest rate ceiling for ECBs, maturity period etc. In the same manner, government puts ceiling for the total amount of ECBs that can be obtained by all Indian firms through the ECB route during an year. At present, this aggregate limit is $40 billion.