An external commercial borrowing (ECB) refers to the loans taken from non-resident lenders i.e. the foreign companies to finance commercial activities in India.
ECBs include 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 the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc. ECBs cannot be used for investment in stock market or speculation in real estate.
There are two ways in which ECB can be accessed in the country:
Automatic Route:
ECBs include 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 the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc. ECBs cannot be used for investment in stock market or speculation in real estate.
There are two ways in which ECB can be accessed in the country:
Automatic Route:
- Under this, the borrower is not to take any permission from RBI or GOI.
- A corporate, other than a financial intermediary, registered under the Companies Act, 1956, can access ECB under the automatic route up to US Dollar $ 500 million in a financial year both for rupee expenditure and / or foreign currency expenditure for permissible end uses.
- The borrowers in the services sector viz. hotels, hospitals and software companies can access ECB under the automatic route up to US$ 100 million in a financial year for import of capital goods, for rupee and / or foreign currency capital expenditure and NGOs engaged in micro finance activities up to US$ 5 million in a financial year.
- Under this, the borrower has to take approval from RBI or GOI.
- The ECB which is not covered by the automatic route is considered under the approval route on a case-by-case basis by RBI.
- At some times, borrowings from external companies can be cheaper than that borrowed within the country.
- Like FDI, ECB is also a source of inflow of money in the country which can benefit the business of country and ultimately the country.
- The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.
