External Commercial Borrowing/ ECB

External Commercial Borrowing or ECB is an instrument used in India to help corporates access foreign money. ECBs include loans, buyer/supplier
credit, special securitized instruments and many more. The department of external affairs along with the central/apex bank RBI and Ministry of Finance regulates the guidelines and policies of ECB. Recently the regulators proposed to consider if affordable/low-cost housing projects can access ECB. The housing projects have been given the stature of infrastructure by the apex bank last year. The same guidelines can be used to help the low cost housing project get access to more external commercial borrowing under infrastructure status.

Advantages of Housing sector as an Infrastructure stature

It is known that infrastructure development like building highways or pipelines is not like most other investments. These facilities are being shared by large number of people thus making it hard to fund. It is always advisable to avail credit facilities at lower rates and longer period for infrastructure companies dealing in the said sector. It is also seen that the initial investment in these projects takes years to recover. Talking of housing sector we see that the sector does have social and economic externalities however, they don’t face the free rider problem. Also pay off in the sector is faster as compared to other infrastructure projects.

Real Estate companies have currently signaled their inability to take advantage of the demand for affordable housing. The 12^th five year plan has clearly identified that 99% of the housing shortage of 24.7 million units at the end of 10^th plan was from the affordable/low income group. The demand of affordable housing has soared high during the period.

Financing for Affordable Housing

It is estimated that over 8.5 lakh crore of financing would be required for affordable housing during the 12th Plan. Of the estimated cost around 25% of the cost would be used to develop the surrounding infrastructure. Government is expected to shed close to 1 lakh crore for the development; however the majority of the fund is to be raised from the private sector companies. It is difficult to understand the future growth path for the companies who are demanding access to ECB. Access to ECB will definitely help the companies get funds required to meet the demand, however how accessing ECB will help companies alter their DNA and provide housing is still doubtful. Moreover, external commercial borrowing is no more available cheaply than regular finance.

Read about Infrastructure Finance Companies of India.

When there was liquidity flush, the real estate companies did not see any reason developing affordable housing. However for cash hungry real estate companies access to any additional borrowing will be attractive. So it is important at this stage to ensure that there is no leakage of funds to other sectors from ECB. Access to ECB funds for low cost housing should be used only for the same purpose. Leakage of money to other more profitable sector, urgent use of money should be checked.

ECB not fruitful for the Indian Real Estate Companies

India’s external account is currently weak. Despite the fact the current account deficit is showing narrow trend it is far from any comfort zone. The country should not increase any sort of external dependency at this point. It is definitely not the right time to help the housing sector use ECBs as India is more susceptible to a sudden crisis. Any nature of borrowing will not generate enough benefits for the nation which can trade off its foreign dependency. Thus when the risks are already very high, it is beneficial to cover the increased risk rather than increasing further exposure.

Thus for the trivial and irresponsible real estate companies, the idea of ECB should be rejected upfront.