External Commercial Borrowing

Syllabus: Economics

Source: PIB

Context: A recent State Bank of India (SBI) report highlights the rising contributions of private sector investments and the role of External Commercial Borrowing (ECBs) in driving corporate financing, modernization, and capital expansion.

What is External Commercial Borrowing (ECB)?

External Commercial Borrowing (ECB) refers to loans or funding raised by Indian entities from foreign sources, including commercial banks, export credit agencies, and international markets. ECBs are typically used for capital expansion, modernization, and infrastructure projects and are governed by the Reserve Bank of India (RBI) guidelines.

Parameter | Data Total Outstanding ECBs | $190.4 billion (as of Sept. 2024) Private Sector Share | 63% ($97.58 billion) Public Sector Share | 37% ($55.5 billion) Hedging (Private Sector) | 74% of hedged corpus ECBs Registered (Apr-Nov 2024) | $33.8 billion Decline in ECB Costs | 6.6% (April-Nov 2024 average) 5.8% (Nov. 2024) Need and Significance of ECB:

• Capital Expansion: ECBs provide long-term funding to finance infrastructure and industrial growth. • Cost-Effective Financing: ECBs offer competitive interest rates compared to domestic loans, reducing the cost of borrowing. • Modernization and Import of Capital Goods: Corporates use ECBs to modernize operations and import advanced machinery. • Foreign Currency Access: ECBs allow Indian firms to access foreign currency, helping in trade and international competitiveness. • Private Sector Growth: With 63% of ECBs attributed to private companies, they play a vital role in supporting private sector expansion. Challenges and Limitations of ECB:

• Exchange Rate Risk: ECBs expose borrowers to currency fluctuations, increasing repayment costs in volatile markets. • High Hedging Costs: Hedging to mitigate exchange rate risk often adds to the borrowing cost. • Global Market Dependence: ECBs make Indian corporates reliant on global financial conditions, which can be unpredictable. • Potential for Over-Borrowing: Mismanagement of ECBs can lead to high corporate debt, affecting financial stability. • Policy Restrictions: Regulatory limitations may hinder flexibility in fund utilization. Way Ahead:

• Policy Refinement: Simplify ECB regulations to encourage strategic borrowing for productive sectors. • Focus on Hedging: Promote affordable and accessible hedging mechanisms to minimize exchange rate risks. • Sustainable Borrowing: Ensure ECBs are utilized for long-term infrastructure and modernization projects to avoid unsustainable debt. • Enhanced Monitoring: Strengthen oversight mechanisms to prevent mismanagement of funds and over-leveraging. Conclusion:

ECBs have been instrumental in financing India’s industrial and infrastructural growth. While challenges like exchange rate risks persist, with sound policies and prudent borrowing practices, ECBs can remain a crucial tool for India’s economic development.

Insta Links:

• Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (UPSC-2019)