External commercial borrowings or ECBs as they are more commonly referred to, have become a very important source of finance for corporates in recent years. In fact, they have enabled several companies to borrow money at a lower cost and hence fund their investment requirements, which has helped in the overall growth process. The main issues concerning this source of finance as well as the possible pitfalls in using them form the core of Ashutosh Raravikar’s India’s External Commercial Borrowing.
The author works with the central bank and hence has a comprehensive grip on the subject and has been able to bring out a fairly comprehensive analysis of this market. Starting with the concept and the trends in their growth, he explores the regulatory aspect as well which encompasses the RBI guidelines that have been progressively liberalised as part of the endeavour of the government to open up markets.
ECBs have complemented India Inc’s borrowing options that were primarily domestic for a very long time. Of late, however, they have grown to become an integral part of the financing structure for the economy and all estimates of future funding of growth invariably include ECBs as one of the sources. The RBI has ensured that there are limits placed on the cost of such funds as well as the tenures to ensure that we do not reach a situation where they are used indiscriminately, as there are forex flows involved when it comes to servicing such debt. By raising the floor of tenure, it is ensured that these funds are used for long-term rather than short-term funding purposes.
The author raises some very pertinent issues in terms of ECBs becoming a part of the growing external debt of the country. While FDI is preferred as it does not involve servicing, the same does not hold for ECBs, which have to be serviced every year. The challenges, as the author points out, are that the currency rate becomes important here as there are tendencies for volatility at times, which can push up the servicing cost, as such debt is denoted in foreign currency. If the rupee depreciates, companies have to pay higher cost for the dollars that have to be bought to service debt. This is eschewed in case they are rupee-denominated (masala bonds).
He also brings in the concept of hedging which is integral to the process of external borrowing. We need to have such markets available where borrowers can hedge their forex risk. Using domestic exchanges is an option where the rupee cost is covered to the extent of the hedging requirement. But it does add to the overall cost of borrowing, which is what companies are trying to lower when they source the ECB market. This is where the fundamental conundrum arises for borrowers.
In the last decade or so following the Lehman crisis, there has been a tendency of central banks across the world to lower interest rates sharply to bring them at times to zero or close to zero. In turn, this has led to a combination of surplus liquidity in the system, as well as lowered the cost of borrowing. This has made external borrowing very attractive and as rates have remained low, the only risk carried was forex. Here, too often, borrowers in India assume that the rupee will not fall very sharply for a long period of time as the RBI has shown that it has intervened in the past to steady rates whenever there has been periodic volatility in the downward direction.
Raravikar does hence present a good handbook on the subject which would be useful to not just companies that are deliberating on various options of finance but also for students where all the issues concerning ECBs are brought to the table. This is very relevant today as there are limits to long-term financing options in the country in the absence of a well-developed corporate bond market which is open to a select set of borrowers. Banks, too, would be handicapped in terms of asset-liability mismatches when it comes to funding long-term lending. This is where ECBs can fill partly the gap. But, as the author keeps reiterating in his analysis, one has to be watchful.
Madan Sabnavis is chief economist, CARE Ratings
India’s External Commercial Borrowing: Features, Trends, Policy and Issues
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