External Commercial Borrowings (ECB) Landscape

Syllabus :GS 3/Economy  

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  • The recent report by the State Bank of India (SBI) has highlighted trends in investment announcements, private sector’s contribution, and role of ECBs in corporate financing.
  • Household Net Financial Savings (HNFS) in India improved to 5.3% of GDP in FY24 from 5.0% in FY23.
  • Investment as a share of GDP has improved in recent years, led by both government and private sector contributions.

External Commercial Borrowings

  • External Commercial Borrowings are commercial loans raised by eligible resident entities from recognised non-resident entities. 
  • These borrowings have to conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

Framework and Guidelines 

External-Commercial-Borrowings
Data Analysis of SBI’s recent report 
External Commercial Borrowings (ECBs) (as of September 2024) have emerged as a key source of funding for Indian corporates, enabling capital expansion and modernization.
1. The total outstanding ECBs stood at $190.4 billion as of September 2024.
2. Of this, the non-Rupee and non-FDI components accounted for approximately $154.9 billion.
3. The private sector held 63% ($97.58 billion), while the public sector accounted for 37% ($55.5 billion).
4. Hedging remains a critical aspect, with private companies hedging approximately 74% of the total hedged corpus.
5. ECBs in FY25 (Up to November 2024) : The ECB pipeline remains strong, reflecting sustained demand for overseas funding.

The Need for ECBs in India

  • Capital Shortage: Domestic financial markets may not meet the needs of large corporations.
  • Lower Interest Rates: ECBs often offer lower rates than domestic loans, reducing the cost of capital.
  • Filling Infrastructure Gap: India’s infrastructure sector requires significant investments.
  • Diversification of Funding: Access to global markets reduces reliance on domestic banks.
  • Support for Export-Oriented Sectors: Helps businesses modernize and stay competitive internationally.
  • Boost to Corporate Growth: Enables expansion, technology upgrades, and enhanced market position.

Limitations and Risks of ECBs

  • Currency Risk: Exchange rate fluctuations can increase repayment costs if the domestic currency depreciates.
  • Interest Rate Risk: Variable interest rates tied to global benchmarks (e.g., LIBOR) can make loans expensive as rates rise.
  • Repayment Risk: Short maturities may lead to refinancing challenges, especially if funds are not readily available.
  • Regulatory Constraints: Strict RBI regulations on borrowing limits, end-use, and compliance can limit flexibility.
  • Macroeconomic Risks: Excessive reliance on ECBs can increase national external debt and strain foreign exchange reserves.

Conclusion and Way Forward 

  • External Commercial Borrowings have become an essential tool for Indian companies looking to access global capital and finance large-scale projects. 
  • ECBs offer significant potential to fuel India’s growth, particularly in sectors like infrastructure, technology, and exports. 
  • However, companies must carefully evaluate their financial position and risk appetite before opting for external borrowings to ensure they are leveraging this financial instrument effectively and sustainably.

Source :PIB