A Business Encyclopedia

External Commercial Borrowings

Definition: The External Commercial Borrowings or ECBs is the financial instrument used to borrow money from the foreign sources of financing to invest in the commercial activities of the domestic country. Simply, borrowing money from the non-resident lenders and investing it in the commercial activities of India is called as external commercial borrowings.

The external commercial borrowings are considered as a source of finance to expand the existing capacity of the Indian corporates and finance new investment ventures, with an objective to have a sound economic growth.

The government of India seeks investment in the infrastructure and core sectors such as power, coal, railways, roads, telecom, etc. which are directly related to economic development of the country.

External commercial borrowings cannot be used for the investments in a stock market or any speculation business. And to keep a check on it, department of economic affairs, finance ministry, government of India and RBI monitor and regulates the policies of external commercial borrowings.

The ECBs is known as the money borrowed from the foreign sources or the non-resident lenders and include Commercial bank loans, Floating rate notes and fixed rate bonds (securitized instruments), Buyer’s and supplier’s credit, credit notes, mortgage-backed securities, etc.

Here, one thing should be made clear that such borrowing is a type of funding other than equity. This means, if the money is used to finance the core capital (equity shares, preference shares, convertible preference shares, convertible debentures, etc.) of any company, then it will be termed as a foreign direct investment and is not included under external commercial borrowings.

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