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What is External Commercial Borrowing (ECB)?

What is External Commercial Borrowing (ECB)?

In simple terms, External Commercial Borrowings (ECB) means commercial borrowings availed (in the form of bank loans, trade credits, securitized instruments) from external source (from abroad) with a minimum average maturity of three years.   The borrowings under ECB takes place in two channels namely automatic route and approved routes. The eligible borrowers like Corporate Importers, Financial Institutions, Housing Finance Companies, Power finance and trading companies, NGOs and SEZs are allowed to access funds through ECB. The borrowings for infrastructure sector and Industrial sector are generally come under automatic route. The rest of the borrowings under ECS are subjected to RBI approval.  The Reserve bank approves ECS proposals from borrowing company based on utilization of funds, all in cost ceiling and recognized lenders (such as International Banks, IFC,ADB, CDC, International capital markets, export credit agencies, suppliers of equipment etc.) on a case to case basis.

Purpose of ECB borrowings:

The borrowing for import of capital goods (as classified by DGFT under Foreign Trade Policy), new projects, modernization/expansion plans of existing manufacturing units including SME, Infrastructure sectors and specified service sectors like hotel, hospital, software and other specified sectors are allowed access for funds through ECB. Individuals, trusts, non-profit making organizations are not eligible to borrow under ECB.

Restrictions in using ECB funds:

There are several restrictions in using the funds under ECB. Funds borrowed under the scheme cannot be used for activities like lending or investment in capital market or for acquisition of a company. Investments in real estate, working capital, repayment of Rupee loans, corporate purpose are prohibited.

Latest uodate:  Refinancing of External Commercial Borrowings:RBI vide its circular A.P. (DIR Series) Circular No.15 dated 4.01.2018 advised all category 1 Authorised dealers to permit the overseas branches/subsidiaries of Indian banks to refinance ECBs of highly rated (AAA) corporates as well as Navratna and Maharatna PSUs, provided the outstanding maturity of the original borrowing is not reduced and all-in-cost of fresh ECB is lower than the existing ECB. Partial refinance of existing ECBs will also be permitted subject to same conditions.Earlier to this the overseas branches/subsidiaries of Indian banks were not permitted to extend such refinance

Maximum amount of borrowings eligible under ECB:

The eligible borrowers under ECB automatic route are eligible to borrow USD 750 million or equivalent per year. The borrowers under approval routes such as hotels, hospitals, software sector are allowed to avail of ECB up to USD 200 million or its equivalent in a financial year for meeting the foreign currency and or Indian Rupee capital expenditure. The money received under ECB should not be used for acquisition of land.  The Micro Finance Institutions and NGOs engaged in micro finance activities are allowed to borrow under ECB up to USD 10 million or its equivalent with a condition that the future foreign exchange exposure should be fully hedged. In the cases of Infrastructure Finance Companies and Asset Finance Companies (NBFC), the company may be allowed to borrow 75% of their own funds against hedging 75% of their currency risk exposures. The Small Industries Development Bank of India (SIDBI) is eligible to borrow up to 50% of its own capital with a maximum limit of USD 500 million or its equivalent per financial year.

Maturity period for ECBs:

The maturity period for ECBs is decided on the amount of borrowings that is;

  1. For ECBs up to USD 20 million or equivalent is 3 years of minimum average maturity.
  2. For ECBs above USD 20 million or equivalent is Five years of minimum average maturity.

(Maximum loan up to USD 750 million or equivalent)

‘All in cost’ Ceiling:

‘All in cost’ means rate of interest, other fees and expenses payable in foreign currency. The local payments like commitment fee, pre-payment fee, fees payable in Indian Rupees and the payment of withholding  tax in Indian Rupees are excluded from ‘All in Cost’. The Reserve Bank of India fixes ‘all-in-cost’ ceiling on ECB from time to time based on the global financial market situation. The investors as well borrowers compare the net gain potential on the basis of ‘all-in-cost’ involved on lending/borrowing through ECB process.

At present  the  ‘all-in-cost’ ceilings for ECBs with average maturity period from 3 years to 5 years is at over six months  LIBOR* + 350 Basis points  (LIBOR* + 3.50%). For average maturity period of above 5 years ‘all-in-cost’ ceiling is at over six months LIBOR* + 500 Basis points (LIBOR* + 5.00%)

*LIBOR (London Interbank Offered Rate) serves as bench mark interest rate on various term loans for respective currency of borrowings charged by the international banks on each other.

In the case of fixed rate loans, the swap cost and margin should be equivalent of the floating rate and applicable margin. The penal interest charged on ECB should not be more than 2 % of all in cost.

Parking of ECB proceeds abroad:

ECB proceeds can be parked overseas, in the following investments, till the amount is in actual requirement in India.

Deposits or Certificate of deposits or Treasury Bills or other products offered by banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s. Deposits can also be placed with an overseas branch of an Indian commercial bank (Categorized as AD).

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