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Making sense of new ECB norms

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The Reserve Bank of India last week relaxed norms for companies raising external commercial borrowings (ECBs), as part of a set of measures to stem the slide in the rupee. Mint explains the logic and implications of the move.

The Reserve Bank of India last week relaxed norms for companies raising external commercial borrowings (ECBs), as part of a set of measures to stem the slide in the rupee. Mint explains the logic and implications of the move.

What are ECBs taken by Indian companies?

ECBs are commercial loans that eligible resident entities can raise from outside India, i.e. from a recognized non-resident entity. ECBs can be buyer’s credit, supplier’s credit, foreign currency convertible bonds, foreign currency exchangeable bonds, loans etc. ECBs can be raised via the automatic route where cases are examined by the Authorized Category Dealer, or the approval route where borrowers are mandated to forward their request to RBI through their authorized dealers. Borrowers must follow norms on minimum maturity period, maximum all-in-cost ceiling, end-uses etc.

What is the relaxation offered by the RBI?

In the first week of July 2022, RBI notified that in the case of ECBs, for a temporary period—up to 31 December, 2022—borrowing limit under the automatic route was being increased from $750 million or its equivalent per financial year to $1.5 billion. The all-in cost ceiling under the ECB framework was being raised by 100 basis points, subject to the borrower being of investment grade rating. The objective of the regulatory authority was to increase the supply of foreign exchange reserves, and thereby prevent the fast depreciation of the rupee witnessed over the last few months.

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What clarity do foreign lenders want from RBI?

Lenders want to know whether the investment grade needs to be rated by domestic or international agencies. If it is only by global agencies, it would limit the number of potential borrowers, as companies which might be rated high domestically might not necessarily have made the investment grade when rated by international agencies.

Why do Indian firms go for ECBs?

ECBs give companies the benefit of borrowing abroad at lower interest rates. They are also an avenue to borrow a large volume of funds for a relatively long period of time. Also, borrowing in foreign currencies enables companies to pay for their machinery import etc.,thereby nullifying the impact of varying exchange rate. ECBs can help diversify the investor base and funds available at lower cost, helping improve profitability of companies. ECB interest rates are also a function of their ratings in the international market.

What are the risks for firms raising ECBs?

Though companies get attracted to ECBs due to lower interest rates, the comfort level of the borrower depends on how stable the rate of exchange is between the borrowing and debt servicing times. Depreciation of the rupee will raise debt servicing burden as compared to what has been worked out at the time of availing of the ECB facility. Thus, the companies might need to incur hedging costs to cover for the exchange rate risk.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH

 

 

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