Liberalization of Foreign Currency fund-raising norms has made ECB option attractive for Indian Corporate due to cheaper costs, flexibility, expeditious processing and depth that global financial markets provide. Regulations define who can borrow, how much could be borrowed, pricing, end-use of borrowed funds, when to get borrowed funds into home country, prepayment of loans and hedging the exposure to avoid exchange risk. Indian Corporate could decide to raise foreign funds via External Commercial Borrowing(ECB) or Trade Credit. The net Exporters of goods and services from India have natural hedge of currency exchange risk as proceeds are received in foreign currency.
Trade Credit covers Supplier’s Credit or Buyer’s Credit whereas ECB comprises of Floating Rate Notes, Fixed rate Bonds, commercial borrowing from ADB, IFC & Other Financial Institutions, Commercial Bank Credit, funds raised from Official Export Credit agencies and FPI investments in dedicated debt funds.
Supplier’s Credit is an arrangement as short term credit arranged by the Exporter for financing purchase of goods or services by Importer. Generally, Importer could opt for part payment and balance on receipt of goods, by signing a promissory note and acknowledging acceptance.
Buyer’s credit is short term finance available to the importer of goods and services from overseas Banks and Financial Institutions for the full or part value of import. The foreign lender generally grants credit based on the letter of comfort issued by the Importer’s Bank.
Floating Rate Notes (FRN) has a variable coupon rate that gets reset at regular intervals, which is linked to London Inter Bank Offered Rate (LIBOR) or Fed rate plus a mark up. These are issued for a maturity period of 3-5 years when medium term in nature or 10 years & above when long term in nature.
Fixed Rate Bond is a debt instrument carrying a fixed coupon rate unlike floating rate note. Owing to fixed interest rates, the market value of the Bonds widely fluctuates with interest rate changes. Therefore, this financial instrument carries a significant interest rate risk.
The other types of ECB raised from Commercial Banks, Global Financial Institutions, Export Credit Agencies and Foreign Portfolio Investors carry a maturity period with prepayment option. Interest rate, marked up over LIBOR or other benchmark rate, is payable at regular intervals besides principal repayment. Other terms and condition as applicable to ECB has to be complied with.
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