Operational Guidelines in External Commercial Borrowings

Here are the notes on the operational guidelines in external commercial borrowings (ECBs):

  • What are ECBs?

ECBs are loans raised by residents in India from non-resident lenders. They are used to finance a variety of projects, such as capital expenditure, working capital, and overseas acquisitions.

  • What are the operational guidelines for ECBs?

The Reserve Bank of India (RBI) has issued guidelines governing the operational aspects of ECBs. These guidelines are set out in the Master Circular on External Commercial Borrowings and Trade Credits.

The key provisions of the guidelines are as follows:

  • ECBs can be raised under the automatic route or the approval route.
  • The automatic route is available for ECBs up to a certain limit.
  • ECBs above the automatic route limit require prior approval from the RBI.
  • The RBI has specified the types of entities that are eligible to raise ECBs.
  • The RBI has also specified the end-uses for which ECBs can be raised.
  • The RBI has set out the terms and conditions for ECBs, such as the minimum maturity, interest rate, and hedging requirements.
  • What are the benefits of ECBs?

ECBs can offer a number of benefits to borrowers, such as:

  • Access to foreign currency financing.
  • Lower interest rates than domestic loans.
  • More flexible repayment terms.
  • The ability to finance long-term projects.
  • What are the risks of ECBs?

ECBs also carry some risks, such as:

  • The borrower may be exposed to foreign exchange risk.
  • The borrower may have to pay higher interest rates if the ECB is raised under the approval route.
  • The borrower may have to comply with stricter terms and conditions, such as a minimum maturity.
  • MCQs on the operational guidelines in ECBs

Here are some MCQs on the operational guidelines in ECBs:

  1. Which of the following is not a requirement for raising an ECB under the automatic route?
    • The borrower must be a resident in India.
    • The ECB must be for a minimum amount of USD 5 million.
    • The ECB must be used for a permissible end-use.
    • The ECB must have a minimum maturity of 3 years.
    • The correct answer is (b). The ECB does not need to be for a minimum amount of USD 5 million under the automatic route.
  2. What is the maximum amount of ECB that can be raised under the approval route?
    • USD 500 million.
    • USD 1 billion.
    • USD 2 billion.
    • There is no maximum limit.
    • The correct answer is (c). The maximum amount of ECB that can be raised under the approval route is USD 2 billion.
  3. Who can approve ECBs under the approval route?
    • The Reserve Bank of India.
    • The State Bank of India.
    • Any authorized dealer bank.
    • The borrower’s company secretary.
    • The correct answer is (a). Only the Reserve Bank of India can approve ECBs under the approval route.