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Daily News Analysis


19th July, 2023 Economy

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Context: Corporate India has signed agreements for external commercial borrowings (ECBs) worth a whopping $12 billion in the April-June quarter, a threefold increase from the same period last year, and almost 80% of the total inflows in the previous fiscal year, according to the Reserve Bank of India (RBI).


  • The Central Bank's latest 'State of the Economy' report revealed that about two-thirds of the ECBs registered in the quarter were meant for investment activities, indicating a possible revival of the private capex cycle in the economy.
    • Most of the ECBs will be utilised for new projects, modernisation, infrastructure development and purchase of capital goods, while less than a quarter of the funds have end uses like refinancing, and working capital.
  • The surge in ECBs comes at a time when the government has been highlighting the robust credit growth, high capacity utilisation levels in the industry, and low leverage ratio among companies in many sectors, as signs of economic recovery. However, not all high-frequency indicators have confirmed a full-fledged rebound in private investments.
  • India's industrial output growth reached a three-month high of 5.2% in May, according to the latest data from the Ministry of Statistics and Programme Implementation. This is a sign of recovery in the manufacturing sector, which has been hit by the Covid-19 pandemic and the subsequent lockdowns.

External Commercial Borrowings


  • External commercial borrowings (ECBs) are loans taken by Indian entities from foreign lenders, such as banks, financial institutions, export credit agencies, suppliers, etc. They are a source of foreign currency funds for Indian businesses and can be used for various purposes, such as capital expenditure, working capital, refinancing of existing loans, etc.
  • ECBs have several advantages for Indian borrowers, such as lower interest rates, longer repayment periods, diversification of funding sources, and access to global markets. However, ECBs also entail some risks and challenges, such as currency fluctuations, regulatory compliance, debt servicing obligations, and exposure to global economic shocks.
  • The Reserve Bank of India (RBI) regulates the ECB policy framework in India, which aims to balance the benefits and risks of ECBs for the Indian economy. The RBI periodically reviews and revises the ECB policy to align it with the changing macroeconomic conditions and market dynamics

Eligible borrowers

  • All entities eligible to receive foreign direct investment (FDI) can raise ECBs under the automatic route, subject to certain sectoral limits and end-use restrictions. Additionally, some entities such as non-governmental organizations (NGOs), microfinance institutions (MFIs), and non-banking financial companies (NBFCs) can raise ECBs under the approval route, with prior permission from the RBI.

Eligible lenders

  • Any entity that is a resident of a country that is a member of the Financial Action Task Force (FATF) or the International Organization of Securities Commissions (IOSCO) can lend ECBs to Indian borrowers. However, overseas branches or subsidiaries of Indian banks cannot lend ECBs to Indian entities, except for certain cases such as foreign currency convertible bonds (FCCBs), foreign currency exchangeable bonds (FCEBs), etc.


  • They provide an alternative source of funding for domestic borrowers, especially when the domestic interest rates are high or the credit availability is low.
  • They help in diversifying the debt portfolio of the borrowers and reducing the currency risk by matching the currency of borrowing with that of revenue generation.
  • They enable the transfer of technology, skills, and best practices from foreign lenders to Indian borrowers, thereby enhancing their competitiveness and efficiency.
  • They support the development of infrastructure, manufacturing, and services sectors, which are crucial for economic growth and employment generation in India.
  • They contribute to the foreign exchange reserves and balance of payments of the country, as they are denominated in foreign currency and do not create any domestic monetary expansion.

Steps Taken by RBI to Promote ECBs

  • Allowing all eligible borrowers to raise ECBs to USD 750 million or equivalent per financial year under the automatic route, without any sector-specific limits.
  • Expanding the list of recognized lenders to include any entity that is a resident of a Financial Action Task Force (FATF) or International Organization of Securities Commissions (IOSCO) compliant country, subject to certain conditions.
  • Permitting the borrowing entities to raise ECBs for any purpose, except for those in the negative list, such as real estate activities, investment in capital markets, equity investment, etc.
  • Simplifying the reporting requirements for ECBs by introducing a single master form for reporting all types of ECB transactions.

Challenges and limitations associated with ECBs

Volatility and uncertainty in global financial markets

  • The global financial conditions affect the availability and cost of ECBs for Indian borrowers. For instance, during periods of global liquidity crunch or risk aversion, foreign lenders may reduce or withdraw their lending to emerging markets like India, leading to a shortage or increase in the cost of ECBs.
  • Similarly, during periods of global monetary tightening or policy divergence, foreign lenders may demand higher interest rates or stricter terms and conditions for lending to emerging markets like India, making ECBs more expensive or difficult to access.

Exchange rate risk

  • The exchange rate movements between the rupee and the foreign currency affect the value and cost of ECBs for Indian borrowers. For instance, when the rupee depreciates against the foreign currency, the value of the principal and interest payments on ECBs increases in rupee terms, making it more burdensome for Indian borrowers to service their debt obligations.
  • Conversely, when the rupee appreciates against the foreign currency, the value of the principal and interest payments on ECBs decreases in rupee terms, making it more beneficial for Indian borrowers to repay their debt obligations.

Regulatory compliance

  • The RBI imposes various rules and regulations on ECBs to ensure that they are used prudently and productively by Indian borrowers and do not pose any systemic risk to the Indian economy. However, these rules and regulations also entail some compliance costs and complexities for Indian borrowers, such as obtaining approvals, reporting requirements, hedging requirements, etc.
  • The RBI may change the ECB policy from time to time, creating uncertainty and unpredictability for Indian borrowers.

Steps that can be taken

Enhance the flexibility and diversity of the ECB policy

  • The RBI can consider relaxing or rationalizing some of the existing norms and restrictions on ECBs, such as expanding the list of eligible borrowers and lenders, increasing the sectoral limits and end-use flexibility, reducing the MAMP and all-in-cost ceiling, etc. This can help in enhancing the flexibility and diversity of the ECB policy and catering to the varied needs and preferences of different borrowers and lenders.

Strengthening the monitoring and supervision of the ECB market

  • The RBI can also consider strengthening the monitoring and supervision of the ECB market, such as improving data collection and dissemination, enhancing the reporting and disclosure standards, enforcing compliance and penal provisions, etc. This can help in ensuring the transparency and accountability of the ECB market and preventing any misuse or abuse of ECBs by Indian borrowers or foreign lenders.

Promoting the development of domestic financial markets

  • The RBI can also work towards promoting the development of domestic financial markets, such as deepening the corporate bond market, encouraging the issuance of masala bonds, facilitating the participation of foreign portfolio investors, etc. This can help in reducing the dependence on ECBs for Indian borrowers and providing them with alternative sources of funding that are more stable and sustainable.


  • ECBs are an important component of India's external debt and financing mix. They offer several benefits for India's economic development and growth. However, they also pose some risks and challenges that need to be managed carefully. India has taken several steps to liberalize and rationalize its ECB regime over the years. However, there is still scope for further improvement and fine-tuning. India should adopt a dynamic and flexible approach towards its ECB policy that balances its costs and benefits in line with its changing needs and circumstances.

Must-Read Articles:

External Commercial Borrowings (ECB): https://www.iasgyan.in/daily-current-affairs/external-commercial-borrowings-ecb#:~:text=External%20Commercial%20Borrowings%20is%20one,of%20doing%20business%20in%20India.


Q. External Commercial Borrowings (ECBs) have some advantages and also some challenges. What are the steps taken by the Indian government to facilitate and regulate ECBs? What are the potential benefits and risks of ECBs for the Indian economy? How can India leverage ECBs to achieve its development goals while minimizing the negative impacts?