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Wednesday, 8 February 2012

Today's One Pager on - External Commercial Borrowings – Simplification of Procedure


External Commercial Borrowings – Simplification of Procedure

Meaning of External Commercial Borrowings (ECB):

An external commercial borrowing (ECB) is a financing facility used in India to facilitate the access to foreign money by Indian corporations and Public Sector Undertakings. ECBs include commercial bank loans, buyers' credit, suppliers' credit, securitised 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. 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. For infrastructure and greenfield projects, funding up to 50% (through ECB) is allowed. In telecom sector too, up to 50% funding through ECBs is allowed. In this regard RBI has now come out with a circular on simplifying the procedure of ECB.

However, ECB is not a free flow facility and is bound by certain restrictions like ECBs cannot be used for investment in stock market or speculation in real estate.

RBI Circular – February 7, 2012:

This note is based on the RBI circular no. RBI/2011-12/390 A.P. (DIR Series) Circular No. 75 dated February 07, 2012.

Applicability:

This circular is applicable to all the Authorized Dealer Category – I Banks.

Crux of this circular:

As per this circular all the following request has to be referred by the Authorised dealer category – I Banks to the Foreign Exchange Department, Central Office, Reserve Bank of India for necessary approval.          

-          Reduction in the amount of ECB
-          changes in the drawdown schedule where the original average maturity period is not maintained
-          reduction in the all-in-cost of the ECB after obtaining the Loan Registration Number (LRN)

Conclusion:

We can say that the guiding principles that would have been followed by RBI for formulating the policies that are applicable to ECB’s are to facilitate the corporates to keep borrowing long term maturities at a low cost, and encourage infrastructure and export sector financing which are crucial for the overall growth of the economy

Although there are disadvantages in ECB it is still high on the list of sources of funds for corporate in the market, as it is believed that debt can be easily hedged of raising funds, as swaps and futures can be used to manage the interest rate risk.

Traditionally, funds from the international market have been cheaper compared to the local markets, and they continue to remain so with the liquid conditions prevailing in the international markets.

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