PRESENTED BY,

NAVYA JAYAKUMAR P
ROLL NO: 20
CONTENT
EXTERNAL COMMERCIAL BORROWINGS
ROUTES FOR ECB
ADVANTAGES OF ECBS
DISADVANTAGES OF ECBS
CONCLUSION
EXTERNAL COMMERCIAL BORROWINGS
• ECB is basically a loan availed by an Indian entity from a
nonresident lender
• Most of these loans are provided by foreign commercial banks and
other institutions
• It refers to commercial loans availed from non-resident lenders with a
minimum average maturity of 3 years
• An external commercial borrowing (ECB) is an instrument used in
India to facilitate Indian companies to raise money outside the country
in foreign currency. The government of India permits Indian
corporates to raise money via ECB for expansion of existing capacity
as well as for fresh investments.
ROUTES FOR ECB
ECB can be availed by either Automatic Route or by Approval Route.
1. ECB through Automatic Route: No Prior RBI Approval
Under automatic route, the government has permitted some eligibility norms
with respect to industry, amounts, end-use etc. If a company passes all the
prescribed norms, it can raise money without any prior approval.
2. ECB through Approval Route: Prior RBI Approval Needed
Under the approval route, the prospective borrowers are required to send
their requests to the Reserve Bank through their Authorized Dealer (AD) Banks
for examination. (Authorized dealer: Means a person authorized as an authorized
dealer under subsection (1) of section 10 of the Foreign Exchange Management
Act, 1999)
ADVANTAGES OF ECBS
• ECBs provide opportunity to borrow large volume of funds
• The funds are available for relatively long term
• Interest rate are also lower compared to domestic funds
• ECBs are in the form of foreign currencies. Hence, they enable the
corporate to have foreign currency to meet the import of
machineries etc.
• Corporate can raise ECBs from internationally recognized sources
such as banks, export credit agencies, international capital markets etc.
DISADVANTAGES OF ECB
• Availability of funds at a cheaper rate may bring in lax attitude on the
company’s side resulting in excessive borrowing. This eventually results in
higher debt on the balance sheet which may affect many financial ratios
adversely.
• Higher debt on the company’s balance sheet is usually viewed negatively
by the rating agencies which may result in a possible downgrade by rating
agencies which eventually might increase the cost of debt. This may also
tarnish the company’s image in the market and market value of the shares
too in eventual times.
• Since the borrowing is foreign currency denominated, the repayment of the
principal and the interest needs to be made in foreign currency and hence
exposes the company to exchange rate risk.
CONCLUSION
Though external commercial borrowings come at lower costs, it comes
with various restriction and guidelines that need to be followed. There exists
restriction on the amount and maturity of the ECB.
ECBS above $ 20 million need to be of minimum average maturity of 5
years and below $ 20 million have a maturity of 3 years.
There are restrictions with regards to end use of the funds too. The
companies may use it for expansion, but they cannot use it for onward
lending, real estate investments, repayment of existing loans and many such
limitations.
ECBs are one of the commonly availed sources of cheaper funds by eligible
companies. However, the companies need to be cautious about the
exchange rate risk and impact on balance sheet debt to use it effectively.