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, and securitized instruments) from external sources (from abroad) with a minimum average maturity of three years.   The borrowings under ECB take place in two channels namely automatic route and approved routes. 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 the 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 companies based on utilization of funds, the 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 hotels, hospitals, software, and other specified sectors are allowed access for funds through ECB. Individuals, trusts, and non-profit making organizations are not eligible to borrow under the ECB.

Restrictions in using ECB funds:

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

Latest update:  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 the same conditions. Earlier to this the overseas branches/subsidiaries of Indian banks were not permitted to extend such refinance

The maximum amount of borrowings eligible under ECB:

The eligible borrowers under the 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 microfinance institutions and NGOs engaged in microfinance activities are allowed to borrow under the 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 its own funds against hedging 75% of its 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 the rate of interest, other fees, and expenses payable in foreign currency. The Local payments like commitment fees, pre-payment fees, 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 the ‘all-in-cost’ ceiling on the ECB from time to time based on the global financial market situation. The investors as well as borrowers compare the net gain potential based on the ‘all-in-cost’ involved in lending/borrowing through the ECB process.

The Reserve Bank of India said banks should ensure no new transactions are linked to an earlier system of LIBOR or the local equivalent – the Mumbai Interbank Forward Outright Rate (MIFOR). Banks in India have already been encouraged to undertake transactions using widely accepted alternative reference rates (ARR) since December 2021. The RBI has offered options like the SOFR (Secured Overnight Financing Rate), which is linked to US treasury market transactions, and the Modified Mumbai Interbank Forward Outright Rate (MMIFOR). SOFR is considered a more accurate and more secure pricing benchmark.

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

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 Certificates 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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