Drastic fall in External commercial borrowings
9:24 AM
It is an instrument used in India to facilitate Indian companies to raise money outside the country in foreign currency.The government of India permits Indian corporates to raise money via ECB for expansion of existing capacity as well as for fresh investments.It can be in the form of bank loans, bonds, etc.ECB can be availed by either automatic route or by approval route.Under automatic route, if a company passes all the prescribed norms, it can raise money without any prior approval.For specific pre-specified sectors, the borrowers have to take explicit permission of the government/The Reserve bank of India (RBI) before borrowing through ECB.
ADVANTAGES OF ECB
• The cost of funds is usually cheaper from external sources.
•Improve the profitability of the companies.
• Availability of larger market.
• The domestic economy also enjoys benefits.
DISADVANTAGES
• Funds at a cheaper rate may bring in lax attitude on the company’s side resulting in excessive borrowing.
• Exchange rate risk to the company.
• High debt on the nation.
Overseas borrowings of India Inc plunged to an 11-quarter low to $3.51 billion during the first quarter of the current fiscal.The overseas borrowings of Indian corporates
for the same quarter last year stood at $12.04 billion, while borrowings during Q4 FY20 touched a peak of $18.97 billion.On a year-on-year basis,ECBs for import of capital goods fell to $198 million ($705 million) in Q1FY21.Borrowings for ‘modernisation’ purpose fell sharply to $146 million ($1,269 million).ECBs towards infrastructure development also fell to $76 million ($500 million) during this period.“With the lockdown that took place, everything has come to a halt.Companies don’t have any investment plans since there are a lot of uncertainties about the future.That’s the main reason why overall borrowings have come down,” said Madan Sabnavis,Chief Economist at CARE Ratings.
WHY ECB WAS PREFERRED BY COMPANIES?
Amid heightened risk aversion in the domestic debt market, coupled with a low interest rate regime abroad,External commercial borrowings (ECBs) have been one of the preferred routes of fund raising for Indian companies in the last few years.Besides, a slew of rationalisation measures taken by the RBI allowing more sectors to tap overseas markets also fuelled this growth. Consequently, India Inc’s ECBs touched a historic high of $51.71 billion in FY20.
BUT STILL WHY NOT DOMESTIC BORROWING?
Despite RBI slashing the reverse repo rate to disincentive banks from parking their
excess funds with them,Banks preferred to park their excess funds with the central bank at a low interest rate rather than risk lending it. According to the RBI’s latest July report,Banks parked nearly ₹8-lakh crore under reverse repo on a daily average basis in the month of May, Against an average of ₹2.4-lakh crore during the March quarter.