Name: ABHAY GUPTA
Division & Roll No: B002
Subject: Financial Management
Topic: Analysis of External Commercial Borrowings
(ECB’S) use in India
Submitted To: MRS. SHILPA ALSHI
What is External Commercial Borrowings?
ECB is basically a loan availed by an Indian entity from a non resident lender.
Most of these loans are provided by foreign commercial banks and other
institutions.
External Commercial Borrowings (ECBs) includes commercial bank loans,
buyers’ credit, suppliers’ credit, securitized instruments such as Floating Rate
Notes and Fixed Rate Bonds etc., credit from official export credit agencies and
commercial borrowings from Multilateral Financial Institutions. ECBs are being
permitted by the Government as a source of finance for Indian Corporate for
expansion of existing capacity as well as for fresh investment.
Why companies opt for ECBs
i. Foreign currency funds: Companies need funds in foreign currencies
for many purposes such as, paying to suppliers in other countries etc
that may not be available in India.
ii. Cheaper Funds: The cost of funds borrowed from external sources at
times works out to be cheaper as compared to the cost of Rupee funds.
iii. Iii. Diversification of investor’s base: Another advantage is the
addition of more investors thus diversifying the investor base
iv. iv. Satisfying Large requirements: The international market is a better
option in case of large requirements, as the availability of the funds is
huge when compared to domestic market.
Rules and Regulations regarding ECBs
The DEA (Department of Economic Affairs), Ministry of Finance, Government of
India along with Reserve Bank of India, monitors and regulates ECB guidelines
and policies.
The ECB policy basically deals with the following aspects: -
1.Eligibility criteria for accessing international financial markets
2.Total quantum / limit of funds that can be raised through ECBs
3.Maturity period and the cost involved
4.End use of the funds raised
5.Conversion of ECBs into Equity
ECB can be accessed under two routes, viz.; (1) Automatic Route outlined (2)
Approval Route
ECB for investment in real estate sector, industrial sector, especially
infrastructure sector in India, are under Automatic Route, i.e. do not require RBI
/ Government approval. In case of doubt as regards eligibility to access
Automatic Route, applicants may take recourse to the Approval Route
Benefits of ECBs over other sources of funds
1. Cost of raising ECBs is much lower than that of domestic borrowings
2. Global financial market is a much bigger source of credit.
3. Foreign lenders provide far more flexibility in terms of providing security for
ECBs
Disadvantages of ECBs
Since the funds are raised through ECBs in foreign currency and the interest &
redemption proceeds are also payable in the foreign currency, the issuing
company has to hedge its foreign exchange exposure, which involves
expenditure. In case the company opts to keep its foreign exchange exposure
unhedged, it carries a huge risk due to fluctuation in foreign exchange rates. RBI
has also acknowledged this problem and has instructed the banks to put in place
a system for monitoring the unhedged foreign exchange exposure of small and
medium enterprises.
The funds raised through ECBs have to be utilized in accordance with the end
uses permitted under the guidelines; as such these funds cannot be utilized for
working capital or general corporate purposes.
RECENT CHANGES IN ECBS
The central bank reduced the mandatory hedge coverage to 70% per cent from
100% for external commercial borrowings (ECB) raised by Indian companies.
“All eligible borrowers can now raise ECBs up to $750 million or equivalent per
financial year under the automatic route replacing the existing sector-wise
limits,” RBI said.
Analysis of ECBs
Almost 60% of external commercial borrowing is raised through secured loans
whereas foreign currency convertible notes form approximately around 18% of
the total external commercial borrowing
The interest rates for unsecured loans are higher than those for secured loans
and hence they are not preferred by companies to raise capital. For banks
secured loans are safer and hence preferred those.
Which Sectors prefer ECBs
The data below shows external commercial borrowing across sectors in 2007
and 2012. This data shows dependency on market conditions or preference for
ECB
Impact of ECB on India’s External Debt
External debt of a country indicates contractual liability of residents to non-
residents. At the end of Mar 2012, as per RBI estimates, the total external debt
for India (including both long and short term debt) stands at $345 billion. The
debt was up 13% from $305 billion at the end of March 2011. The rise in External
Commercial Borrowing was one of the major contributors of the rise in external
debt accounting for 39.7 per cent of the increase in total debt.
EXTERNAL COMMERCIAL BORROWING BY HOUSING FINANCE SECTOR
Banks are exercising caution in new disbursals amid loan-related
delinquencies, India’s real estate developers are largely depended on housing
finance companies (HFCs) and non-banking finance companies (NBFCs) for
credit. NBFCs and HFCs are non-banks, and are governed by the National
Housing Bank (NHB). Banks on the other hand are governed by the Reserve
bank of India (RBI). The RBI’s recent move to ease external commercial
borrowings (ECB) norms would ensure HFCs have enough money to lend to
India’s real estate developers.
Housing finance companies are planning to raise funds through the external
commercial borrowing (ECB) route to diversify their funding requirements.
Early this year, Indiabulls Housing Finance had tapped the market and more
recently, Housing Development Finance Corporation (HDFC) announced such
plans. Tata Capital Housing Finance and Dewan Housing Finance are also likely
to tap the market this year.
Under the expanded scope of ECB, HFCs will be able to borrow from oversees
without having to seek an approval from the central bank. The RBI has also
increased the ECB liability-to-equity ratio to 7:1 on direct borrowing from
foreign entities from the earlier 4:1. This relaxation means HFCs will be able to
borrow more, and lend more, in turn. Earlier, the liability-to-equity ratio for
borrowing directly from a foreign lender was 4:1.
LEADER’S SAY
R Vaithianathan, managing director of Tata Capital Housing Finance,
said if a good opportunity comes up, then the company might raise
funds through the ECB route. “This is the first time we are planning to do
this. The funds will be deployed in affordable housing projects,” said
Vaithianathan. The company is also planning to raise funds through a
combination of bank loans, borrowings from the market and re-finance
facility from the National Housing Bank.
Harshil Mehta, chief executive officer, Dewan Housing Finance, said:
“Yes, we plan ECBs this year, but it would be too early to disclose any
further details on the same.”
Mortgage lender PNB Housing Finance on Saturday said it has raised
$200 million (about Rs 1,470 crore) through External Commercial
Borrowing (ECB), its first under the automatic route of the RBI.
This year, the Reserve Bank of India has allowed housing finance companies to
borrow through ECB up to USD 750 million annually under the automatic
route, the company said in a statement.
Future Outlook
An issue for the country is that while ECBs can be a blessing for some companies,
it raises the issue of sustainability of external debt at the macro-level.
We can expect an increase in demand for ECBs amongst the Indian Companies
because of the following reasons: -
1. Plans for Huge Spending on Infrastructure projects
2. Domestic interest rates are moving upwards
There has been a downward trend in pricing and that is making companies go
for ECBs. The costs have come down by 50 basis points in the past one year for
well-rated borrowers. More than lower costs, companies are thinking of
diversifying their funding pool; so they are tapping this route. Costs have been
coming down because of dearth of supplies
