DMPQ- . What is external commercial borrowing (ECB) ? Point out the importance of ECB for India’s external investment.

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An external commercial borrowing (ECB) is an instrument used in India to facilitate Indian companies to raise money outside the country in foreign currency. The government of India permits Indian corporates to raise money via ECB for expansion of existing capacity as well as for fresh investments.

Other such external sources of finance/capital include FCCBs and FCEBs. While foreign currency convertible bonds are issued to raise finance, ECB refers to commercial loans which can be in the form of bank loans, bonds, securitized instruments, buyers’ credit and suppliers credit availed from non-resident lenders with a minimum average maturity of 3 years.

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).

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.

 

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