Context: As per the latest RBI data, External Commercial Borrowing (ECBs) registrations by Indian companies shot up about 84% in FY24 to $49.2 billion, against $26.7 billion in FY23.
What are External Commercial Borrowings (ECBs)?
- External commercial borrowing (ECBs) are loans in India made by non-resident lenders in foreign currency to Indian borrowers.
- They are used widely in India to facilitate access to foreign money by Indian corporations and PSUs (public sector undertakings).
- ECBs include commercial bank loans, buyers' credit, suppliers' credit, securitised instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.
- ECBs cannot be used for investment in the stock market or speculation in real estate.
- Regulated by: 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.
- ECBs are part of the Capital Account in Balance of Payments.
What is the Balance of Payments?
- The balance of payments (BoP) records the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period typically a year.
- There are two main accounts in the BoP — the current account and the capital account.
Capital Account
- Capital Account records all international transactions of assets.
- An asset is any one of the forms in which wealth can be held, for example: money, stocks, bonds, Government debt, etc.
- Purchase of assets is a debit item on the capital account. If an Indian buys a UK Car Company, it enters capital account transactions as a debit item (as foreign exchange is flowing out of India).
- On the other hand, sale of assets like the sale of shares of an Indian company to a Chinese customer is a credit item on the capital account.
- Balance on Capital Account:
- Capital account is in balance when capital inflows (like receipt of loans from abroad, sale of assets or shares in foreign companies) are equal to capital outflows (like repayment of loans, purchase of assets or shares in foreign countries).
- Surplus in capital accounts arises when capital inflows are greater than capital outflows, whereas deficit in capital account arises when capital inflows are lesser than capital outflows.
- India has witnessed capital account surplus in the recent past.