Page 481 - ES 2020-21_Volume-1-2 [28-01-21]

108 Economic Survey 2020-21 Volume 2

Figure B3.2: Weighted Average Margin Over Reference Rate

2.6
2.4
2.2

2.0
Per cent 1.8

1.6
1.4

1.2
1.0
2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20

Source: RBI

Literature (Acharya V, et al., 2015; Verma & Prakash, 2011 and Ray et al, 2017) identifies
both country-specific idiosyncratic (push) factors as well as generic and global (pull) factors
as drivers of ECBs in the Indian context. The country-specific factors include domestic real
economic activity, exchange rate, interest rate and inflation, status of domestic corporate
bond market, degree of openness in terms of capital account and the regulatory framework.
Global financial conditions including rates of interest, global growth and inflation are among
the pull factors. Accordingly, the slowdown in the economic activity during H1 of 2020-
21, among others, may have caused ebbing of India Inc's appetite for ECBs. The on-going
COVID-19 pandemic is expected to adversely impact export earnings of external commercial
borrowers. To the extent such earnings are dented, their repayment capacity would potentially
get adversely impacted, thereby creating a source of potential vulnerability going forward.

As a capital scarce growing economy with large investment needs, it has been India’s long-
standing policy to encourage capital inflows to augment domestic savings with a bias towards
flows that are stable, long term and least prone to sudden stoppages and reversals. Accordingly,
the motivation has, inter alia, been to minimize currency risk by mandatory hedging and roll-
over risk by stipulating average minimum maturity while enabling firms to access foreign
borrowing by fixing a dynamic limit as a ratio to GDP coupled with regulating end-use.

This broad paradigm has evolved over the years with a view to promote ease of doing
business. As an integral part of this broader endeavour, a new and simplified ECB policy
was put in place in March 2019 by removing the scope of arbitrage, creating a level playing
field for all eligible borrowers, and widening the base of borrowers and lenders. Further,
development of financial markets in India has been accorded due importance to enable the
external commercial borrowers to hedge their interest and currency risk. More importantly, in
order to address potential system stability risk to other stake holders arising out of individual
corporate-borrower vulnerability, the regulatory prescription for incremental provisioning