External Commercial Borrowing

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Definition: External Commercial Borrowing

External Commercial Borrowing is defined by Reserve Bank of India in the following way: “commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, and securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of three years”.

The main advantage of borrowing from international sources is to use the differences in interest rate- for example, the loan could be sourced from outside at 200 points above LIBOR (London Interbank Offer Rate) while the domestic cost of capital may be more expensive. The government also promotes ECB to increase investments in specific sectors in the country. The main risk associated with ECB is currency risk – the liability can greatly increase if the domestic currency depreciates, but with appropriate hedging this can be prevented.

ECB can be accessed through the automatic route – which does not require permission from Government of India, as well as approval route – which will require permission to be obtained from GOI.

Hence, this concludes the definition of External Commercial Borrowing along with its overview.

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