External Commercial Borrowing (ECB)

External Commercial borrowing (ECB) refers to commercial loans availed by companies from non-resident lenders in the form of bank loans, buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes and fixed rate bonds). A company is allowed to raise ECB from internationally recognized source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. However, offers from unrecognized sources are not entertained.

External Commercial Borrowings (ECBs) include bank loans, suppliers and buyers credits, fixed and floating rate bonds (without convertibility) and borrowings from private sector windows of multilateral Financial Institutions such as International Finance Corporation.

In India, External Commercial Borrowings are being permitted by the Government for providing an additional source of funds to Indian corporate and PSUs for financing expansion of existing capacity and as well as for fresh investment, to augment the resources available domestically. ECBs can be used for any purpose (rupee-related expenditure as well as imports) except for investment in stock market and speculation in real estate.

What it includes

Commercial bank loans, buyer’s credit, supplier’s credit, securitized instruments such as floating rate notes, fixed rate bonds etc., credit from official export credit agencies, commercial borrowings from the private sector window of multilateral financial institutions such as IFC, ADB, AFIC, CDC etc. and Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds.

The government has been streamlining and liberalising the ECB procedures in order to enable the Indian corporate to have greater access in the financial markets. The RBI has been empowered to regulate the ECBs. ECB provide additional sources of funds for the corporate and allows them to supplement the domestic available resources and take advantage of the lower interest rates prevailing in the international financial markets.


ECBs are being permitted by the government as an additional source of financing for expanding the existing capacity as well as for fresh investments. The policy of the government also seeks to emphasize the priority of investing in the infrastructure and core sectors such as Power, telecom, Railways, Roads, Urban infrastructure etc. Another priority being addressed is the need of capital for Small and Medium scale enterprises.

Modes of raising ECBs

ECB constitutes the foreign currency loans raised by residents from recognised lender. The ambit of ECB is wide. It recognizes simple form of credit as suppliers’ credit as well as sophisticated financial products as securitization instruments. Basically ECB suggests any kind of funding other than Equity (considered foreign direct investment) be it Bonds, Credit notes, Asset Backed Securities, Mortgage Backed Securities or anything of that nature, satisfying the norms of the ECB regulations. The different borrowings and loans that come under the ECB roof are:

  • Commercial Bank Loans: These loans constitute the term loans taken by companies from banks outside India
  • Buyer’s Credit: Buyer’s credit is the credit availed by the importers of goods/services from overseas lenders such as Banks and Financial Institutions for payment of their Imports on the due date. This lending is usually based on the letter of Credit (a Bank Guarantee) issued by the importer’s bank, i.e., the importer’s bank acts as a broker between the Importer and the Overseas lender for arranging buyers credit by issuing its Letter of Comfort for a fee.
  • Supplier’s Credit
  • Securitized instruments such as Floating Rate Notes (FRNs), Fixed Rate Bonds (FRBs) , Syndicated Loans etc.
  • Credit from official export credit agencies
  • Commercial borrowings from the private sector window of multilateral financial institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC,
  • Loan from foreign collaborator/equity holder, etc and corporate/institutions with a good credit rating from internationally recognized credit rating agency
  • Lines of Credit from foreign banks and financial institutions
  • Financial Leases
  • Import Loans
  • Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds
  • External assistance, NRI deposits, short-term credit and Rupee debt
  • Foreign Currency Convertible Bonds
  • Non convertible or optionally convertible or partially convertible debentures

What is not included under ECBs

  • Investment made towards core capital of an organization viz.
  • Investment in equity shares
  • Convertible preference shares
  • Convertible debentures
  • Instruments which are fully and mandatorily convertible into equity within a specified time are to be reckoned as part of equity under the FDI Policy
  • Equity capital
  • Retained earnings of FDI companies
  • Other direct capital (inter-corporate debt transactions between related entities)

Advantages of ECBs

Benefits to the borrower

  • Foreign currency funds: Companies need funds in foreign currencies for many purposes such as, paying to suppliers in other countries etc that may not be available in India.
  • Cheaper Funds: The cost of funds borrowed from external sources at times works out to be cheaper as compared to the cost of Rupee funds.
  • Diversification of investor’s base: Another advantage is the addition of more investors thus diversifying the investor base
  • Satisfying Large requirements: The international market is a better option in case of large requirements, as the availability of the funds is huge when compared to domestic market.
  • Corporate can raise ECBs from internationally recognised sources such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity holders, international capital markets etc.

Benefits to the economy

As can be seen from the policies formed to regulate the ECB, these borrowings have some apparent benefits for the economy. The government through these policies is trying to nourish 2 sectors:

  • Infrastructure
  • SME

The policies do not require any approval for investment under a limit in these 2 sectors. Thus it is easy to acquire foreign loans for such enterprises. Apart from that, the low cost of funds in the global market provides the small and medium enterprises funds at low costs thus bringing in more money in these sectors.

Benefits to the investor

  • ECB is for specific period, which can be as short as three years
  • Fixed Return, usually the rates of interest are fixed
  • The interest and the borrowed amount are repatriable
  • No owners risk as in case of Equity Investment

Also, we can see that India’s debt management policy has significantly improved over the years.Thisis reflected in various external debt indicators. The debt service ratio, which is the ratio of external debt to the GDP of the country and is an indicator of an economy’s debt servicing capability, has improved, dropping to 17.4 per cent in March 2005 as compared to 38.7 per cent in end-March, 1992. It is noteworthy to mention that debt owed to the International Monetary Fund (IMF) was fully extinguished by 2000-01.

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