Explanation: About External Commercial Borrowings (ECBs):

• ECBs are commercial loans that eligible resident entities raise from outside India. ECBs include buyer’s or supplier’s credit, foreign currency convertible bonds, foreign currency exchangeable bonds, and loans among others.
• ECBs can be raised via the automatic route where cases are examined by Authorized Category Dealer or the approval route where borrowers are mandated to forward their request to RBI through their authorized dealers.

Relaxation in ECB Norms:

• RBI has increased the quantum of funds that can be raised by Indian firms through ECBs. The limit has been increased from US$ 750 million to US$ 1.5 billion till December 2022, under the automatic route.
• The objective of this relaxation was to increase the supply of foreign exchange reserves and thereby prevent the fast depreciation of the rupee witnessed over the last few months.

Benefits of raising Credit through ECBs

• Companies can borrow credit at a lower interest rate from abroad;
• ECBs offer flexibility to borrow a large volume of funds for a relatively long period of time;
• Borrowing in foreign currencies enables companies to pay for their machinery imports etc. thereby nullifying the impact of varying exchange rates;
• ECBs help in diversifying the investor base and access funds at lower cost. This improves profitability.

Risks associated with ECBs

• ECBs are susceptible to exchange rate risk. If the currency depreciates during the term of loan, it raises cost of debt servicing (a simplified example: a company borrows US$ 1 million @10% annual interest for 1 year when the exchange rate was INR 70/$.
• Thus, it borrowed INR 70 million in Rupee terms. If after 1 year the Rupee has depreciated to INR 80/$, then the company ends up paying INR 80 million + 0.8 million interest, instead of INR 70 + 0.7 million interest).

Source: EPIC August 2022