External Commercial Borrowings Research Articles

Correction to: An empirical examination of the effect of domestic monetary policy on external commercial borrowings to India

Correction to: An empirical examination of the effect of domestic monetary policy on external commercial borrowings to India

An empirical examination of the effect of domestic monetary policy on external commercial borrowings to India

An empirical examination of the effect of domestic monetary policy on external commercial borrowings to India

Role of Bank Credit and External Commercial Borrowings in Working Capital Financing: Evidence from Indian Manufacturing Firms

Determinants and levels of working capital financing (WCF) in the manufacturing sector have been empirically proven to impact firm profitability across emerging as well as developed nations. With time, firms adjust toward financing their working capital requirement (WCR), although the speed of adjustment, financing constraints, and bargaining power are subject to variations. In this study, we estimate the effect of bank credit and firm foreign currency borrowing on working capital financing with three distinct models for manufacturing firms in India. We examine the relationship between short-term foreign currency borrowings and WCF. Further, we investigate if the internal capital market affects WCF in the form of business group affiliation; lastly, we assess the impact of bank dependency and financial distress on WCF. We conclude that the debt–equity ratio becomes relevant, whereas firm characteristics such as age, size, and asset tangibility become irrelevant. Our original contribution to the literature is the finding that even smaller emerging market firms with well-managed, low debt exposure have improved access to WCF. Our results support that financial distress negatively impacts WCF but deviates from macroeconomic fundamentals, such as the GDP growth rate. This indicates deterioration in the health of Indian manufacturing, as a capital-intensive sector. Bank dependency remains significant, wherein smaller firms and those without a dividend pay-out continue to have longer cash conversion cycles and less efficient WCR. As a unique finding, we note foreign currency borrowings significantly contribute to WCF in the case of less developed credit markets in emerging economies such as India.

External Commercial Borrowings and Outward Foreign Direct Investment: Evidence From Indian Manufacturing Firms

The study investigates the effect of external commercial borrowings (ECB) on outward foreign direct investment (OFDI) using data on Indian manufacturing firms from 2008 to 2020. Our analysis, using the Heckman two-step procedure (1979), suggests a positive effect of ECB on firms’ OFDI. The results indicate that firms using more leverage and ECB are firms with higher OFDI intensity.

Sustainable finance from foreign actors into renewable energy and economic growth: An Indian perspective

Energy is a basic ingredient to the economic growth story. Given the increased climate change risk, India like all other countries must transit from fossil -based energy to renewable energy. The transition requires large investments from domestic and foreign actors. The major source of sustainable finance from foreign actors is through the Foreign Direct Investment and External Commercial Borrowings routes. This study analyses the causal relationship between ‘Foreign Direct Investment and Economic Growth’ and ‘External Commercial Borrowings and Economic Growth’ in India in Renewable Energy sector, also explores the causal relationship between Foreign Direct Investment and External Commercial Borrowings. The study will help in recommending policy changes to increase Foreign Direct Investment and External Commercial Borrowings into Renewable Energy in India.

External Commercial Borrowings by Indian Firms: A Blessing or Curse

In the first half of FY19, ECBs touched a high of $25.17 billion in the April – September period, which was 53 per cent higher than the $16.48 billion raised by Indian entities in the same period last year; it was $42 billion for FY19. Taking Reliance Industries Limited (RIL) as a case point, the researchers analysed the advantages of borrowing by a firm through an ECB and its impact on the company's net profit and shareholder's returns vis-à-vis borrowing the same money through a premium domestic public sector bank. The analysis of the loan of $300 million (`13.8 billion) taken as an ECB against being borrowed domestically through a strong public sector bank showed that it was beneficial for the firm to borrow due to differential interest rates through an ECB. Thus, the rationale that interest rate differential between rates charged for ECB and borrowing within the domestic boundaries of a county influences ECBs and that firms should hedge a minimum specified percentage of their currency exposure while borrowing through ECBs holds true.

Nexus between external commercial borrowings and foreign exchange reserves in India: mercantilism or moral hazard?

We examine the nexus between the staggering rise in the central bank’s forex reserves and corporate borrowings denominated in foreign currency. We use dynamic panel data models by drawing novel data of Indian firms to probe the moral hazard hypothesis. Our investigation shows no evidence that forex reserves act as an implicit guarantee for the corporate sectors to borrow in foreign currency in the long run. The ARDL reinforces our firm-level estimates. Albeit, the VAR analysis does not rule out causality between forex reserves and ECB in the short run. We show that forex reserves mainly help manage capital flows into the economy and maintain domestic monetary stability. The accumulation of forex reserves implies mercantilist motives of the central bank to reduce imbalances in the economy by keeping the exchange rate depreciated and domestic exports competitive.

FOREIGN EXCHANGE RESERVES IN INDIA- A POLICY PERIOD ANALYSIS

Motivation/Background: Foreign exchange reserves (forex reserves) received large-scale interest among the developing economies because of rapid increase in globalization, the acceleration of capital flows and the integration of capital markets domestically and globally as well. The expansion in the volume of trade activities and capital inflows in the form of investments and external commercial borrowings (ECBs) has led to the emergence of importance of managing the foreign exchange reserves. Foreign exchange reserves (FER) are regulated and managed by the various countries’ central banks.
 Method: The study is divided into four policy periods, namely, Liberalization, Globalization, World Recovery and Global financial crises. It will be using semi log growth equation model with dummy variables to find out the growth rates in foreign exchange reserves for different policy periods. Trends in foreign exchange reserves have been analysed for the period 1991-2017.
 Results: The finding of the study presents that the level of foreign exchange reserves are statistically significant in all the policy periods except world recovery, and the growth rates are also significant in all the policy periods.
 Conclusion: The current paper can be of great use for the policy makers as it will help them to analyse the trends in foreign exchange reserves in India not only during various policy periods but also in predicting the future trends of the foreign exchange reserves.

Effects of foreign currency debt on investment of the firms in emerging economy

AbstractIn this study, we examine the effect of external commercial borrowings on investment of the firms in the wake of currency depreciation by drawing the firm‐level data from India. Despite steep growth in dollar debt and its critical implications for firms and macroeconomic stability, the issue was not explored before. This article attempt to fills this gap and contribute to the literature on dollar debt and open economy macroeconomics. We estimate the panel regression to quantify the balance sheet and competitiveness effects. We show that currency depreciation does not adversely affect the investment of those firms that borrow in foreign currency. The findings of the study imply that the gradualist approach to liberalization and prudential policy measures laid by regulatory bodies were effective. We also find that firms that incur dollar debt do not possess adequate natural hedge against exchange rate volatility. This finding calls for the mandatory hedging by firms to immune the economy from the contagion effect. The development of offshore derivatives markets is indispensable for such hedging. The findings also call for the availability of easy and cheaper domestic credit to the corporate sector to lessen the over‐reliance on external commercial borrowings.

Dynamics of external commercial borrowings in India

Dynamics of external commercial borrowings in India

Why do Indian Firms Borrow in Foreign Currency?

We investigate why firms in emerging economies such as India borrow in foreign currency. The results of a dynamic panel regression approach suggest that both firm-specific factors and macroeconomic factors are significant in explaining the corporate sector dollarization. Export revenue and tangible assets are primary drivers of the external commercial borrowings (ECBs) of non-financial firms, whereas the ECBs of financial firms are sensitive to interest rates in global markets. The policy measures to relax restrictions on firm borrowing in foreign currency facilitate the denomination of corporate debt in foreign currency, but such exposure was adversely affected by the global financial crisis. The findings of the study suggest the vital need to develop the domestic bond market to reduce firms’ dependency on external finance. The results also call for competitive interest rates in the domestic fixed income segment through monetary policy intervention. JEL Classification: G300, G320, F310

Do external commercial borrowings and financial development affect exports?

In this study, we examine the competitiveness effect of currency depreciation in the presence of external commercial borrowing (ECBs) and low financial development. The estimates of autoregressive ...

External commercial borrowings by the corporate sector in India

The growing levels of external commercial borrowings (ECBs) among the emerging and developing economies have raised the fears that ECBs would lead to widespread crisis and threaten financial stability in India. Against this backdrop, the current study seeks to examine the trends and critically evaluate the policy pertaining to ECBs. In order to immune the economy from potential exchange rate shocks, we suggest to having specific policy focus on the domestic bond market, hedging mechanisms, and appropriate decisions on the cap and level of ECBs by the regulator.

Bayesian and EVT Value-At-Risk Estimates of India's Non-Financial Firms

The Companies Act 2013 has made it mandatory for firm’s Board of Directors Report to include a statement indicating elements of risk faced by companies. In the IMF report of March 2015, it is mentioned that India’s non-financial company’s external commercial borrowings rose by 107% between March 2010 to March 2014. The stress test based on exchange rate and profits demonstrated continuing high vulnerabilities of the firms. Looking at both the important factors, the current study estimates the Value-at-Risk (VaR) of 106 non-financial Indian firms. It is well a documented fact that return series is nonnormal, therefore taking bivariate distribution of return and foreign exchange rate. VaR is calculated using the extreme value theory method and Bayesian method. The results suggest that Bayesian method provides the best VaR estimates

FOREIGN CAPITAL FLOWS AND ECONOMIC GROWTH OF KENYA.

The purpose of the study was to establish the effects of foreign capital flows on economic growth of Kenya. The study employed a quantitative research design. The target population of this study was Kenya since it is the Center of analysis. Considering that the population is one country, Kenya, secondary data was collected over a period of 25 years from 1993 to 2017. Therefore, the number of observations was X * 25 = 25. The research conducted a census on Kenya using secondary data from Nairobi Securities Exchange (NSE), Capital Markets Authority (CMA), Kenya National Bureau of Statistics (KNBS), Central Bank of Kenya, World Bank and United Nations Conference on Trade and Development (UNCTAD). Data over time was analyzed using a time series model and trend analysis. Model test and correlation analysis were done before conducting regression and univariate regression analysis. The study found that, when external commercial borrowing is increased by one US dollar, annual GDP will increase by 395.990% when all other factors are kept constant. The opposite also applies. But, if external commercial borrowing is zero, annual GDP will decrease by USD 8,151,662,920.94 when all other factors are kept constant. Additionally, when Foreign Portfolio investment is increased by one US dollar, annual GDP will increase by 805.37% when all other factors are kept constant. The opposite also applies. But, if Foreign Portfolio Investment is zero, annual GDP will remain to be USD 25394237979 when all other factors are kept constant. Also, when FDI is increased by one US dollar, annual GDP will increase by 3026.30% when all other factors are kept constant. The opposite also applies. But, if FDI is zero, annual GDP will still increase by USD 18493289187.3 when all other factors are kept constant. Further results revealed that when Non-Resident Kenyan Deposits are increased by one US dollar, annual GDP will increase by 3738.65% when all other factors are kept constant. The opposite also applies. But, if Non-Resident Kenyan Deposits is zero, annual GDP will remain to be USD 4869680695.47 when all other factors are kept constant. The study recommends that the Government pursues policies that will attract and favour net increases in Foreign Direct Investments, Foreign Portfolio Investments, External Commercial Borrowings and Non-Resident Kenyan deposits into the country.

Not Sustainable: India's Trade and Current Account Deficits

ABSTRACTIndia's trade balance and current account have shown persistent deficits for a major part of its post‐independence period. Since the mid‐2000s, trade deficits have increased perilously, with a sharp rise in both oil and non‐oil imports. India has relied on services exports, remittances and capital inflows to offset trade deficits and sustain the current account deficit. This article examines the sustainability of relying on capital inflows, remittances and services exports to sustain these persistent trade and current account deficits. It argues that all three sources entail elements of fragility. The recent global economic slowdown, economic recessions in the United States and Europe, slow economic recovery, low growth forecasts and possibility of a secular slowdown in the United States and Europe raise questions about whether services exports and remittances can continue to generate sufficient earnings to offset trade deficits. Relying on capital inflows also carries risks of financial fragility, with short‐term capital inflows and external commercial borrowings becoming more prominent in the Indian economy.

Does Brownian Risk Matter in Debt or Equity Issuance and Repurchase Decision in Indian Non-Financial Companies?

External commercial borrowings (ECBs) of Indian non-financial firms have grown by 107 % in past few years. Looking at the high reliance of firms on external debt, this paper investigates the effect of foreign exchange, interest rate and firm specific risk on the debt issuance and retirement decision. It also investigates the factors affecting equity issuance and retirement decision of the firms. Foreign exchange risk and interest rate risk is estimated using stochastic volatility and GARCH (1,1) methods. Firm specific risk is calculated using Black-Scholes Merton model for company valuation. The results highlight that interest rate risk negatively affects the debt issuance and positively affects debt retirement decision of the firms. However, the foreign exchange risk does not affect debt issuance and retirement decision. Firm-specific risk negatively affects propensity of debt issuance of firms but plays no role in debt retirement. Foreign exchange risk, firm-specific risk, and profitability negatively affect propensity of issuance of debt to issuance of equity. This result supports the view that risky firms are more likely to finance their capital needs via new equity issues rather than by new debt issues to avoid the high-risk premium and to limit the likelihood of bankruptcy.

Growth of Venture Capital and Private Equity in India

Venture capital and private equity (VCPE) investments have been evolving as a potential source of corporate finance, forming a part of India’s emerging story. The role of VCPE investments in fueling business creation, innovation, and growth in India cannot be understated. Through an enabling regulatory environment and favorable macroeconomic indicators, India went through many life stages in the growing trends of VCPE investments before reaching its present level of importance today. This study analyzes the factors affecting the growth trends of VCPE investments in India from 1998–2016 in terms of the value of investments and number of deals and the penetration of VCPE investments across various industries in India. At the current pace of development of equity, bonds, external commercial borrowings, and bank credit pools, VCPE investments will have to double in order to fund the government’s growth targets.

Fiscal Imbalance, Risk Premium and Financial Crisis - An Analysis of the Argentinean Crisis

This paper shows how fiscal imbalance and excessive external borrowing may lead to a financial crisis. The trigger of the crisis is substantial increase in risk premium as a result of persistent budget deficits. This results in hyper depreciation of exchange rate, which causes an adverse balance sheet effect on investment in the presence of external commercial borrowings. This leads to a contraction of output and the country enters into recession. Furthermore, policy prescriptions are provided to curtail the crisis. The situation in Argentina is analysed in the light of this model.

Direct Tax Incentives to Power Sector in India: A Case Study

The article examines in detail, as a test case, the impact of direct tax incentives on the power sector in India. The Indian power sector is regulated and has been the greatest beneficiary of the various tax incentives. Direct taxes foregone to the power companies alone are estimated to be ₹700,000 million during the fiscal year 2006–2007 to 2014–2015. The power companies in India have enjoyed profit-linked tax holidays (Section 80 IA), accelerated depreciation (Section 32), easy accessibility of external commercial borrowings and a low withholding tax of 5 per cent on overseas borrowing. The study does a ‘three-way examination’ of the impact of the tax incentives by examining: (i) macroeconomic indicators, (ii) firm level data and (iii) micro-indicators. The findings are that (i) there is no evidence of any real benefits accruing to the economy either in the form of increased foreign direct investment (FDI) flows to the sector, gross fixed capital formation (GFCF) in the sector or commensurate growth in electricity sector vis-à-vis other sectors of the economy or in the economy as a whole due to the several decades of direct tax incentives to the power sector in India; (ii) clearly, the loss of revenue from the tax incentives is real and substantial and (iii) the financial ratios of the three power companies (National Thermal Power Corporation [NTPC], Tata Power and Reliance Energy) indicate that they are capable of raising resources on their own and the theory of market failure may not apply to them.