External commercial borrowings (ECBs) raised by India Inc in gross terms shot up seventeen-fold between 1990-91 and 2007-08, per a study by the Reserve Bank of India (RBI) in one of its occasional papers on ?Corporate choice for overseas borrowings: The Indian evidence? authored by Bhupal Singh, assistant adviser in the department of economic analysis and policy.
Additionally, the composition of India?s external debt reveals that ?ECBs? constitute the largest component of external debt after ?external assistance?. ECB liabilities witnessed more than a six-fold increase between March 1991 and March 2008.
The sharp rise in commercial debt has taken place since the turn of the century, the period when corporate demand for external financing rose significantly due to a sustained rise in domestic economic activities and favourable conditions in the international capital markets. As a result, the share of commercial debt in India?s external debt increased from 12% in March 1990 to 28% in March 2008.
The concentration of loans disbursed as per different size buckets reveals a broader access to finance through ECBs for smaller companies. 75% of the total number of loans is concentrated in the category of small size loans, up to $20 million. 86% of the total number of loans is concentrated under the loan size up to $50 million is category. Thus, it can be concluded that external borrowings are characterised by a large number of companies accessing the international markets for smaller size loans.
In terms of the share, smaller size loans, up to $20 million, witnessed a decline in its share in the aggregate amount of loan raised from 22% in 2005 to 9% in 2007. This has occurred due to acceleration in the pace of large sized loans, over $100 million, whose share has risen from 34% to 67% during the same period. This can be attributed to the a number of Indian companies accessing the market for financing overseas acquisitions and conducting sizeable transactions relating to leasing and hire purchase of aircrafts by the domestic airline companies for capacity expansion.
Singh noted that the foregoing empirical analysis brings forth some important perspectives. First, ECBs are characterized by a large number of companies accessing the international markets for smaller size loans. Second, there is evidence of a balanced maturity structure which was also impacted favourably by a moderation in the interest rate cycle. Third, the utilisation pattern of ECBs reveals that about 70% of borrowings are utilized for import of capital goods, setting up new projects and for modernization or expansion of existing units.
With momentum in Indian investment abroad through JVs and wholly owned subsidiary?s, the use of ECBs for financing overseas investment has also grown in significance. The report also states that the spread of implicit cost of commercial borrowings over the LIBOR has significantly narrowed down during the period 1991-92 to 2006-07 from a peak of about 700 basis points in 1992-93 to 100 basis points in 2006-07, reflecting the deep and liquid global financial markets, benign liquidity conditions and gradual upgradation in the sovereign rating and improved corporate performance during the reporting period.