Benefits of External Commercial Borrowing (ECBs)| Enterslice

ECB is basically a loan availed by an Indian entity from a nonresident lender. Most of these loans are provided by foreign commercial banks and other institutions. It is a loan availed of from non-resident lenders with a minimum average maturity of 3 years.

The significance of ECBs their size in India’s balance of payment account. In the post reform period, ECBs have emerged a major form of foreign capital like FDI and FII.

During several years, contribution of ECBs was between 20 to 35 percent of the total capital flows into the country. Large number of Indian corporate and PSUs have used the External Commercial Borrowing as sources of investment.

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. Following are the advantages of ECBs.

The following are some of the main benefits of raising funds using ECB:

• The value of funds is generally lower when borrowed from external sources. For instance, there are economies that have a lower interest rate, and Indian firms and organisations can borrow money at lower interest rates from the Eurozone and the United States as the rates are comparatively low.
• Since the markets are larger when raising funds through ECB, companies can meet larger requirements from international players in comparison with what can be achieved through domestic players.
• External Commercial Borrowing is basically just a way to take a loan. It does not necessarily have to be of equity nature, and therefore the company’s stakes will not be diluted. Borrowers can essentially raise funds without relinquishing control as debtors will not have any voting rights in the company.
• The investor base can be diversified by the borrower.
• ECB offers access to global markets so that borrowers have greater exposure to worldwide opportunities.
• ECB offers benefits to the economy as well. Inflows can be directed into the sector by the government of India, thereby increasing its potential for growth. For instance, a greater percentage of funding through ECB can be allowed by the government for the SME and infrastructure industry. This aids significantly in the overall growth of the country.
• Companies can become increasingly profitable through ECB.