Increasing reliance on external commercial borrowings by corporates with external risks is a serious concern to Indian economy. Comment (200 Words)
Refer - Business Standard
Enrich the answer from other sources, if the question demands.
IAS Parliament 5 years
KEY POINTS
· In External commercial borrowings, the trend changed from 2017-18, when the ECB registrations shot up by 31 per cent. With a 45 per cent increase in ECB registrations in 2018-19, policy makers of the finance ministry, should be as concerned over the trend as those in the RBI.
· Data is based on applications made for ECB or foreign currency convertible bonds (FCCB), against which registrations are allotted during this period.
· Since this will be eventually captured in the country’s balance of payments with minor adjustments, the rising trend is an advance indication of the nature of pressure ECBs could put on India’s management of the external sector.
· A recent study by CARE Ratings has drawn attention to the many aspects of the sharp rise in the ECB registrations. The relatively elevated levels of interest rates, before they began declining a bit, tightening liquidity in the domestic economy putting pressure on companies to look for external sources of financing, slowing activity in the corporate bonds market and the continued stress in the banking sector.
· In 2019, the RBI had relaxed the guidelines for approval of ECB applications. Earlier, the minimum maturity period was three, five and 10 years, based on the purpose and quantum of the ECB.
· With the relaxation, the minimum maturity period was reduced to three or five years. The new guidelines, therefore, allowed Indian entities to borrow more under the ECB route and with a shorter maturity period.
· It is clear from both the registrations data and the policy relaxations that Indian companies find ECB to be an increasingly preferred and attractive route for meeting their financial needs.
· This may be a comment on the banking sector’s inability to meet the Indian corporate sector’s fund requirements on attractive terms and the tight liquidity situation in the domestic economy.
· The share of ECB in India’s total external debt of over $510 billion is on the rise, the reduced maturity period for ECB could adversely impact India’s overall external debt profile.
· While companies applying for ECB should always be on their guard, the government too should not be unmindful of the dangers of increasing reliance on such borrowings with external risks.
