External Commercial Borrowings and Trade Credits: Banking Awareness Special Series

Team Adda247 and Bankers Adda have introduced a Special Banking Awareness series for SBI and IBPS Interviews 2021. In this series, we will be introducing the candidates with some banking awareness topics Daily that will improve their general awareness and will also ensure that the candidates do not lack in any banking term when it comes to the interview round. Today the topic of our Banking Awareness Series is External Commercial Borrowings and Trade Credits.

External Commercial Borrowings and Trade Credits

      External Commercial Borrowings: External Commercial Borrowings (ECB) is a loan that is availed by an Indian from a foreign or non-resident lender. Mostly these loans are provided by foreign commercial banks and other institutions. These loans are availed by nonresidents have generally minimum average maturity period of 3 years. They are used for facilitating foreign money to Indian corporations and PSU (public sector undertakings). 

Commercial bank loans, buyer’s credit, security instruments such as floating rate notes and fixed-rate bonds, suppliers’ credit, etc. are types of external commercial borrowings. External Commercial Borrowings cannot be used in the stock market for investment or any other transactions or even it cannot be used in speculative activities in real estate. 

External Commercial Borrowings’ guidelines and policies are regulated by the Department of Economic Affairs, Ministry of Finance, Government of India along Reserve Bank of India.

Advantages of ECB:

• It gives an opportunity to borrowers for using a large volume of funds.
• Lowered interest rates compared to domestic funds
• ECBs are in the form of foreign currencies thus they can be used to pay for imported goods or services. 
• ECBs are provided for the long term thus stability of funds can be used in expanding business. 

Trade Credits: Trade credits is an agreement between business to business in which customer purchases goods without paying money in cash and money will be paid to the vendor at a scheduled later date. Generally, trade credits give 30, 60, or 90 days to pay money. Sometimes it is allowed to pay in 120 days also.

It is a type of zero percent financing and it increases a company’s assets while deferring payment for a specified value of goods or services to a prescribed time in the future and requires no interest to be paid at the time of repayment. 

Trade credit is a very good way for businesses to free up cash flow and finance short-term growth. 

It is a new financial technology solution that is encouraged by regulators globally. 

Advantages of Trade Credits:

• It is a simple and easy way to access finance for business.
• It is an affordable type of financing which has no extra cost compared with other ways of financing like banking loan.  
• Trade credits also make a business profiles and professional relationships with vendors. 
• It leads to higher sales volumes because buyers purchase more because of no-cost financing.