What relaxed ECB norms mean for companies?

Source: The post is based on the article “What relaxed ECB norms mean for companies?” published in Livemint on 18th July 2022.

What is the News?

The Reserve Bank of India has relaxed norms for companies raising external commercial borrowings (ECBs) as part of a set of measures to stem the slide in the rupee.

What are External Commercial Borrowings(ECBs)?

E​​CBs 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, 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.

Borrowers must follow norms on minimum maturity period, maximum all-in-cost ceiling, end-uses etc.

What is the relaxation offered by the RBI for ECBs? 

RBI has increased the quantum of funds that Indian firms could raise through external commercial borrowings.

It has been announced that till December 31, 2022, companies availing of the automatic ECB route could raise up to $1.5 billion as against $750 million earlier

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.

Why do Indian firms go for ECBs? 

Firstly, ECBs give companies the benefit of borrowing abroad at lower interest rates.

Secondly, they are an avenue to borrow a large volume of funds for a relatively long period of time.

Thirdly, borrowing in foreign currencies enables companies to pay for their machinery imports etc thereby nullifying the impact of varying exchange rates. 

Fourthly, ECBs can help diversify the investor base and funds available at lower cost, helping improve the profitability of companies.

Fifthly, ECB interest rates are also a function of their ratings in the international market.

What are the risks involved 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 the 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.