External Commercial Borrowing Basics for Indian Companies

External commercial borrowing can be a game-changer for Indian companies looking to expand their operations or take on new projects.

In India, external commercial borrowing is governed by the Reserve Bank of India's (RBI) guidelines, which dictate the terms and conditions for companies to borrow from abroad.

The RBI has set a limit on the amount of external commercial borrowing that Indian companies can undertake, which is currently set at $500 million or 50% of the company's foreign exchange earnings, whichever is lower.

This limit is intended to prevent companies from taking on excessive debt and to ensure that they have sufficient foreign exchange to repay their loans.

An ECB, or External Commercial Borrowing, is a loan raised by eligible resident entities from recognised non-resident entities. This can include banks, export credit agencies, and international capital markets.

ECBs are a flexible source of finance, but their usage is stringently monitored to avoid misuse. According to RBI guidelines, ECBs can be used for various purposes such as capital goods imports, new projects in sectors like manufacturing and infrastructure, and modernization or expansion of existing units.

The funds raised through ECBs are available for a relatively long term, which can be beneficial for corporates looking to invest in large projects. ECBs also provide an opportunity to borrow a large volume of funds, which can be used to meet various business needs.

ECBs are in the form of foreign currencies, which enables corporates to have foreign currencies to meet their import needs. This can be particularly useful for corporates that need to import machinery or equipment.

Here are some examples of ECBs:

ECBs offer several benefits to corporates, including providing foreign currency funds that may not be available in India. This can be a game-changer for companies that need to access international markets.

The cost of funds can be cheaper with ECBs, working out to be lower than the cost of Rupee funds at times. This is a significant advantage for companies looking to reduce their borrowing costs.

ECBs also help in diversifying the investor base, which can be beneficial for corporates looking to reduce their dependence on a single market. This can be especially useful in times of economic uncertainty.

Here are some of the eligible sources for raising ECBs:

Benefits of using a bank for your FDI needs include getting your funds settled seamlessly from 29+ currencies. A team of trained professionals will take care of your pre and post transaction requirements.

You can expect flawless and simplified regulatory reporting, which can be a huge relief. This is made possible by a team of experienced professionals guiding you through the procedure and documentation.

ECBs offer lower interest rates compared to domestic funds, making them an attractive option. They also provide an opportunity to borrow a large volume of funds for a relatively long term.

Here are some of the key benefits of ECBs:

ECBs can also help in diversifying your investor base and provide a better option for large requirements due to the huge availability of funds in the international market.

Entities eligible to receive a Foreign Direct Investment (FDI) can also raise an External Commercial Borrowing (ECB). This includes Port Trusts, Units in Special Economic Zones (SEZ), SIDBI, and EXIM Bank of India.

Startups can raise ECBs, and a recognized lender or investor from a Financial Action Task Force (FATF) compliant country is permitted to lend to them. However, foreign branches or subsidiaries of Indian banks and overseas entities in which Indian entities have made overseas direct investment are not considered recognized lenders.

Some eligible borrowing entities include Corporates in manufacturing, infra, and service sectors, such as hotels, hospitals, and software companies. Units of SEZ for captive requirements are also eligible.

NGOs engaged in microfinance, subject to conditions where forex exposure is fully hedged, can also raise ECBs. Infrastructure Finance Companies (IFCs) for lending to infrastructure projects and Small Industries Development Bank of India (SIDBI) for lending to Micro, Small and Medium Enterprises (MSMEs) are eligible as well.

Here is a list of eligible entities:

To apply for External Commercial Borrowings (ECBs), you'll need to register the loan with the RBI by acquiring a Loan Registration Number (LRN) beforehand.

Before availing of the funds, the borrower has to register the loan with the RBI by acquiring a Loan Registration Number (LRN). This is a crucial step in the process.

The RBI allows ECB borrowers to park the loan proceeds abroad in liquid assets until they're utilized or remit the funds to India for approved rupee expenditures. This flexibility is a key aspect of the RBI's regulations.

Strict compliance with RBI guidelines ensures that ECBs align with India's broader economic strategy while mitigating risks such as foreign exchange exposure. This balance is essential for making ECBs a sound means of scaling for Indian businesses.

External commercial borrowing (ECB) can be a complex process, but understanding the limits and costs can help businesses make informed decisions. Businesses need to consider the loan amount, maturity, and all-in cost cap to assess the viability and cost efficiency of borrowing funds from international markets.

The RBI specifies permissible annual limits for the amount an entity can raise through ECB, which vary by sector. Corporates in non-service sectors can raise up to USD 750 million per year, while service sector entities are limited to USD 200 million annually.

To determine the all-in cost of an ECB, the RBI uses LIBOR or similar benchmarks, depending on the currency of the loan. This ensures that borrowing costs are kept competitive while protecting businesses from extremely high interest rates.

The all-in-cost ceilings for ECBs are as follows:

These ceilings help businesses manage risk effectively while investing in growth and expansion. By understanding these limits and costs, businesses can make informed decisions about borrowing funds from international markets.

The regulatory framework for external commercial borrowings (ECBs) in India is governed by the Reserve Bank of India (RBI) and the Government of India. The RBI issues guidelines for ECBs, which are applicable from time to time, and these guidelines are outlined in the Foreign Exchange Management Act, 1999.

Eligible borrowers can access ECBs through two routes: the Automatic Route and the Approval Route. The Automatic Route is suitable for sectors like manufacturing, infrastructure, hotels, hospitals, and software, while the Approval Route is required for high-value external commercial borrowings and sensitive or non-standard uses.

Eligible borrowers under the Automatic Route include corporates registered under the Companies Act, except financial intermediaries. The maximum amount of ECBs that can be raised by an eligible borrower under the Automatic Route is US$ 500 million during a financial year.

ECBs should have a minimum maturity period, which varies based on the all-in-cost ceiling. The all-in-cost ceiling includes the rate of interest, other fees and expenses in foreign currency, except commitment fee, pre-payment fee, and fees payable in Indian Rupees.

Here are the current all-in-cost ceilings for ECBs:

* for the respective currency of borrowing or applicable benchmark.

To comply with RBI guidelines for ECBs, borrowers must register the loan with the RBI by acquiring a Loan Registration Number (LRN) before availing of the funds. This ensures that ECBs align with India's broader economic strategy and mitigates risks such as foreign exchange exposure.

External commercial borrowing can be a complex and nuanced topic, but it's essential to summarize the key takeaways.

The total amount of external commercial borrowing in our country has been increasing steadily over the past few years, with a significant jump in 2020.

As we've discussed, external commercial borrowing can be both a blessing and a curse, providing much-needed capital for businesses while also increasing the risk of debt accumulation.

The average interest rate for external commercial borrowing is around 5-7%, which may seem reasonable but can add up quickly over time.

In the end, it's crucial for businesses to carefully weigh the pros and cons of external commercial borrowing and consider alternative financing options before making a decision.

The potential risks of external commercial borrowing, including increased debt and reduced creditworthiness, should not be taken lightly.

By being informed and responsible, businesses can navigate the world of external commercial borrowing and make the best decisions for their financial futures.