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External Commercial Borrowings
External commercial borrowings have emerged in the past few years as one of the instruments preferred by Indian companies to raise debt. However, its growing share in the composition of the country’s external debt is a cause for concern for the economy as the exposure to interest rate and currency fluctuation increases.
External commercial borrowings (ECBs) have emerged as one of the chief conduits for strengthening the Indian corporate debt market. However, it comes with its caveats. RCom, a listed Indian telecom firm with an external debt worth ₹443 billion, defaulted on its interest payments on two outstanding domestic non-convertible debentures on 13 November 2017. It was regarded as case of a high-profile default on international debt (Wire 2017). However, on 29 December 2017, Reliance Jio purchased RCom’s assets, providing the necessary cash infusion to pay off its debts and prevented a possible liquidation. Whether the RCom incident is a stand-alone event or a precursor to similar events, it needs to be explored to safeguard Indian economy from potential vulnerability.
The steady expansion and rapid re-emergence of private sector debt in the emerging countries of Asia is reminiscent of the debt boom of the developed economies which culminated in the financial crisis of 2008–09. The proportion of credit allocated to the non-financial sector out of the gross domestic product (GDP) is 2.58 times for China while it is 1.27 times for India as of March 2017 (BIS Statistics Explorer 2017). The increase in credit inflow to the non-financial sector for China is estimated to shoot up to 3.21% by the end of 2021 (BIS Statistics Explorer 2017). An asymmetric growth of the debt level exposes an economy to unchartered risks. It destabilises a booming economy, causing it to become fragile. This situation was explained by Hyman Minsky in his “financial instability hypothesis” (Minsky 1992). The “Minsky moment” occurs due to a sudden drop in asset prices after a period of prolonged growth initiated by debt or currency pressures. It is a case of “systemic breakdown” of the economy following a period of “overt optimism” of borrowers, lenders and regulators. The rapid rise in debt levels had prompted the former People’s Bank of China Governor Zhou Xiaochuan to warn about the emergence of possible “Minsky moments” in the global financial architecture (Bloomberg News 2017).
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