Mobilising Cost Effective International Funds with External Commercial Borrowing
Have you ever considered borrowing money through External Commercial Borrowing (ECB)?
Most people have to borrow capital at some point or the other. A well-hidden secret is that you can borrow money at a cheaper interest rate if you borrow from a foreign lender. (Sometimes, half the interest as compared to domestic lending)
If you compare the interest rates in developed countries with developing countries, it will be obvious to you how profitable it can be for an Indian business to borrow money from Japan, EU or the USA as compared to any domestic lender.
However, the spoiler is that apart from finding a willing borrower from another country, you have to deal with heavy regulations on commercial borrowing by the governments. The terminology used for such foreign loans is External Commercial Borrowing.
WHAT is ECB?
Loan raised by a Domestic entity from a foreign entity subject to certain parameters is called ECB.
ECB is a boon for companies as they offer a cheaper source of funds and flexibility on the collateral coverage.
Forms can be availed in the form of
- Bank Loans
- Securitized Instruments
- Buyer`s/Supplier Credit
- Foreign currency bonds
- Financial Lease
ECB Vs Foreign Direct Investments (FDI)
- In ECB, borrowing of foreign currency is done in the forms and mode mentioned above, whereas FDI is investment by a Foreign entity in a Domestic Entity in the form of Equity, Convertible preference shares, Convertible debentures
- ECB is a debt and hence the lender does not take ownership control of the borrowing entity, whereas in FDI the investor takes managerial control of the entity
- There is no restriction on the end use prescribed in the case of FDI whereas ECB is subject to restrictions
ECB Vs Domestic Bank Loans
|Suitability||Suitable for startups and emerging markets||May not be suitable for startups as banks lend only for entities with substantial track record|
|Rates||Cheaper rates of interest||Domestic borrowings carry a high rate of Interest|
|Security||Flexibility with regard to collateral coverage||Valuable collateral coverage generally 1:1 coverage|
|Forms||ECB can be obtained in any of the forms mentioned above||Bank borrowings are restricted to Working capital facility or term loan facility or Non-fund based facility such as BG/LC|
|Regulatory bodies||Being a cross-border transaction, it is subjected to cumbersome regulations of the law of the land||Not much of regulations|
Promises and Perils of ECB
- The rates are lower
- The list of eligible lenders has also been expanded
- Global Playground- Access to international market
- Cheaper funds leads to improved profitability
- Far more flexibility in providing securities for ECB lenders
- Long-term fundraising without dilution of equity
- Suitable only for long-term debts (beyond 5- 10 years ) as the currency fluctuations may get reversed in the normal course of time
- Careful hedging is required in the case of short-term players as Currency fluctuations may turn adverse
- Hedging is costly
- Funds not to be utilized for Corporate or Working capital purposes
Suitability of ECB
- More opportunity for emerging sectors requiring high capital investments where the credit available in the market is limited
- More suitable for startup companies since there is no restriction on the end use of funds or the cost of funds in the case of startups