External industrial borrowings or ECBs as they are more typically referred to, have grow to be a really vital supply of finance for corporates in current years. In truth, they have enabled various businesses to borrow funds at a decrease price and therefore fund their investment specifications, which has helped in the general development procedure. The major challenges regarding this supply of finance as properly as the probable pitfalls in making use of them kind the core of Ashutosh Raravikar’s India’s External Commercial Borrowing.
The author performs with the central bank and therefore has a extensive grip on the topic and has been capable to bring out a pretty extensive evaluation of this industry. Starting with the idea and the trends in their development, he explores the regulatory aspect as properly which encompasses the RBI suggestions that have been progressively liberalised as aspect of the endeavour of the government to open up markets.
ECBs have complemented India Inc’s borrowing solutions that had been mainly domestic for a really extended time. Of late, even so, they have grown to grow to be an integral aspect of the financing structure for the economy and all estimates of future funding of development invariably involve ECBs as one of the sources. The RBI has ensured that there are limits placed on the price of such funds as properly as the tenures to make sure that we do not attain a predicament exactly where they are employed indiscriminately, as there are forex flows involved when it comes to servicing such debt. By raising the floor of tenure, it is ensured that these funds are employed for extended-term rather than brief-term funding purposes.
The author raises some really pertinent challenges in terms of ECBs becoming a aspect of the increasing external debt of the nation. While FDI is preferred as it does not involve servicing, the very same does not hold for ECBs, which have to be serviced every single year. The challenges, as the author points out, are that the currency price becomes vital right here as there are tendencies for volatility at occasions, which can push up the servicing price, as such debt is denoted in foreign currency. If the rupee depreciates, businesses have to spend greater price for the dollars that have to be purchased to service debt. This is eschewed in case they are rupee-denominated (masala bonds).
He also brings in the idea of hedging which is integral to the procedure of external borrowing. We require to have such markets out there exactly where borrowers can hedge their forex threat. Using domestic exchanges is an alternative exactly where the rupee price is covered to the extent of the hedging requirement. But it does add to the general price of borrowing, which is what businesses are attempting to decrease when they supply the ECB industry. This is exactly where the basic conundrum arises for borrowers.
In the final decade or so following the Lehman crisis, there has been a tendency of central banks across the globe to decrease interest prices sharply to bring them at occasions to zero or close to zero. In turn, this has led to a mixture of surplus liquidity in the method, as properly as lowered the price of borrowing. This has created external borrowing really appealing and as prices have remained low, the only threat carried was forex. Here, as well normally, borrowers in India assume that the rupee will not fall really sharply for a extended period of time as the RBI has shown that it has intervened in the previous to steady prices anytime there has been periodic volatility in the downward path.
Raravikar does therefore present a excellent handbook on the topic which would be helpful to not just businesses that are deliberating on many solutions of finance but also for students exactly where all the challenges regarding ECBs are brought to the table. This is really relevant today as there are limits to extended-term financing solutions in the nation in the absence of a properly-created corporate bond industry which is open to a pick set of borrowers. Banks, as well, would be handicapped in terms of asset-liability mismatches when it comes to funding extended-term lending. This is exactly where ECBs can fill partly the gap. But, as the author keeps reiterating in his evaluation, one has to be watchful.
Madan Sabnavis is chief economist, CARE Ratings
India’s External Commercial Borrowing: Features, Trends, Policy and Issues
Ashutosh Raravikar
Ultimate Associates
Pp 56, Rs one hundred