Context:
Several Non-Banking Financial Companies (NBFCs) in India are postponing plans to raise funds through External Commercial Borrowings (ECBs) due to rising hedging costs triggered by geopolitical tensions in the West Asia region.
External Commercial Borrowings (ECBs)
External Commercial Borrowings (ECBs) are loans raised by Indian entities from foreign lenders in foreign currency or sometimes in Indian rupees. These borrowings help companies access international capital markets for financing their business activities.
The framework for ECBs in India is regulated by the Reserve Bank of India (RBI).
These loans can be in the form of:
- Bank loans
- Buyers’ credit
- Suppliers’ credit
- Bonds (such as Foreign Currency Convertible Bonds – FCCBs)
- Securitised instruments
Eligible Borrowers
Entities allowed to raise ECBs include:
- Companies in manufacturing and services sectors
- Non-Banking Financial Companies (NBFCs)
- Infrastructure companies
- Housing finance companies
- Microfinance institutions
- Start-ups (under specific conditions)
Why NBFCs Use ECBs
NBFCs generally tap overseas markets to:
- Diversify funding sources
- Access large global capital pools
- Borrow at potentially lower interest rates than domestic funding
However, the cost advantage depends on hedging costs used to protect against exchange-rate volatility.
