Context:
Non-Banking Financial Companies (NBFCs) in India are increasingly turning to External Commercial Borrowings (ECBs) for cheaper and more diversified funding as domestic banks delay passing on the benefits of recent repo rate cuts.
External Commercial Borrowings (ECBs)
Definition:
- External Commercial Borrowings (ECBs) refer to loans in foreign currency borrowed by Indian entities from non-resident lenders.
- Widely used by Indian corporations and Public Sector Undertakings (PSUs) to access foreign capital.
Key Sources of ECBs:
- Foreign commercial banks
- Buyers’ and suppliers’ credit
- Securitized instruments: e.g., Floating Rate Notes (FRNs), Fixed Rate Bonds
- Export Credit Agencies
- Multilateral financial institutions: IFC (Washington), ADB, AFIC, CDC
Regulatory Framework:
- Governed under: Foreign Exchange Management Act (FEMA), 1999
- Regulated by:
- Department of Economic Affairs (DEA), Ministry of Finance
- Reserve Bank of India (RBI)
- ECBs can be raised via:
- Automatic Route: Cleared by AD Category-I Banks
- Approval Route: Requires prior RBI approval through AD Banks
Usage Restrictions:
- Not allowed for:
- Investment in stock market
- Speculative real estate activities
Permissible Use and Limits:
- Up to 25% of ECB proceeds can be used to repay rupee debt
- 75% must be used for new projects
- ECB cannot be used to refinance the entire rupee loan
- Minimum Average Maturity Period (MAMP) applicable to all ECBs
Sector-Specific Limits:
- Infrastructure & Greenfield projects: Up to 50% funding via ECBs allowed
- Telecom Sector: Up to 50% ECB funding permitted
- NBFC-IFCs: ECB limit raised from 50% to 75% of owned funds
- Automatic Route Caps:
- Corporates: Up to $750 million/year
- Service sector: Up to $200 million/year
- NGOs for microfinance: Up to $10 million/year
