FULL FORM OF ECB

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WHAT IS ECB

       ECB stand for External Commercial borrowing. It is an instrument used to facilitate Indian companies to raise money outside the country in foreign currency. The government of India allows Indian corporates to raise money through ECB for expansion of their existing business or for fresh investments.
     ECB is a commercial loan,bonds,buyer's credit,bonds, securitized instrument,and suppliers credit availed from non resident with a minimum average maturity of 3 years.

 ROUTES FOR ECB 

     ECB can be availed by automatic route or by approval route. Under automatic route the government has set some eligibility norms with respect to industry,amounts,end use etc. If a company comply all the prescribed norm,it can raise money without any prior approval.
    Under approval route the borrowers have to take permission of the government/The reserve bank of India before borrowing through ECB. RBI has issued formal guidelines and circulars specifying rules for borrowing. 

ADVANTAGE OF ECB

      There are so many advantage of the external commercial borrowing some of which are as follows --

1.   Arranging fund through ECB is cheaper because of the low interest rate.

2.   ECB is a form of loan and after a certain period of time it can be repaid. So it does not dilute stake in the company and debtors do not enjoy voting right.

3.   The economy will be benefited as the government may allow the direct inflow into the sectors which have potential to grow. For instance the government may allow the higher percentage of ECB  funding in infrastructure and SME sector. This will help in overall development of the country.

4.     Availability of fund at lower interest rate may improve the profitability of the companies and will help in economic growth.

DISADVANTAGE OF ECB 

    There are some disadvantage of the ECB also which are as follows  --

1.   Sometimes availability of funds at cheaper rate may inculcate careless attitude on the company's side resulting in excessive borrowing. This will finally lead to higher debt on the balance sheet that may affect many financial rations adversely.

 2.   Higher debt on the company's balance sheet is viewed negatively by the rating agencies that may result in possible downgrade by the rating agency which eventually might increase the cost of debt.
       This will also tarnish the company's image in the market.

3.   Since ECB borrowing is in foreign currency, the repayment of the principle and interest amount needs to made in foreign currency hence company exposes to exchange rate risk.












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