ECB (EXTERNAL COMMERCIAL BORROWING) NORMS EASED
05, Sep 2018
Prelims level : Paper – II Indian Economy & Issues related planning, growth development Mains level :
- The Reserve Bank Wednesday eased norms for companies in manufacturing sector to raise overseas funds and allowed Indian banks to market Masala Bonds in line with the government’s measures to prop up the rupee
- Following a review of the economy by Prime Minister, the government announced an array of measures to check the decline of rupee and curb the widening current account deficit (CAD).
- Liberalization of the External Commercial Borrowing (ECB) norms was among other measures announced by the government
What’s ECB (external commercial borrowing)?
- 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
- ECBs cannot be used for investment in stock market or speculation in real estate. 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.
What’s the change in ECB norms:
- It has been decided, in consultation with the Government of India, to liberalize some aspects of the ECB policy including policy on Rupee denominated bonds
- As per the extant norms, ECB up to USD 50 million or its equivalent can be raised by eligible borrowers with minimum average maturity period of 3 years
- It has been now decided to allow eligible ECB borrowers who are into manufacturing sector to raise ECB up to USD 50 million or its equivalent with minimum average maturity period of 1 year itself.
- Presently, Indian banks, subject to applicable prudential norms, can act as arranger and underwriter for RDB (Rupee Denominated Bond) issued overseas and in case of underwriting an issue, their holding cannot be more than 5 per cent of the issue size after 6 months of of issue.
- It has now been decided to permit Indian banks to participate as arrangers/underwriters/market makers/traders in RDBs issued overseas subject to applicable prudential norms.
Advantage of ECBs:
- ECBs provide opportunity to borrow large volume of funds
- The funds are available for relatively long term
- Interest rate are also lower compared to domestic funds
- ECBs are in the form of foreign currencies. Hence, they enable the corporate to have foreign currency to meet the import of machineries
- Corporate can raise ECBs from internationally recognized sources such as banks, export credit agencies, international capital markets
Is it Enough?
- Largely, rupee depreciation is based on a number of external factors which India couldn’t control like U.S Fed rate hike, spiralling trade war between USA and China, and because of election year and the related uncertainty about results in India etc. But, tweaking of ECB norms is a small step in the direction of correcting rupee fall further and also it will help the Indian companies working abroad to attract foreign currency more