The full form of ECB is External Commercial Borrowing. External Commercial Borrowing (ECB) is an instrument used to facilitate Indian companies or big corporations to raise money outside the country in foreign currency. It is fundamentally a loan availed by an Indian company from a non-resident foreign lender.
Most of the ECBs are raised by companies through foreign commercial banks and other institutions. Indian corporations can raise money via ECB for the expansion of existing capacity as well as for fresh investments.
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Routes of ECB
Have a look at the roots of ECB:
- Automatic route: If a business meets all of the government-specified requirements, it is automatically permitted to raise capital.
- Route of approval: Before borrowing money from the ECB, borrowers in certain industries must obtain government approval.
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Advantages of ECB
Here are some of the main advantages of ECB:
- The ECB offers the chance to take out a sizable amount of long-term debt.
- Borrowing money from nations with lower interest rates typically results in lower costs of funding.
- The ECB enables the borrower to broaden its investor base.
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Disadvantages of ECB
Here are some of the disadvantages of ECB:
- The availability of external commercial borrowings may encourage enterprises to take on risky debt, which would increase the amount of debt on their balance sheets and harm their financial ratios.
- More debt on a company’s balance sheet is seen unfavourably by rating agencies, which could lead to a market downgrade for those companies.
- The principal and interest must be paid in foreign currencies as well because funds are obtained through external commercial borrowing in foreign currencies. The corporation exposes itself to the risks related to currency exchange rates as a result.
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