India is one of the world's largest economies, ranking fifth after the United
States, China, Japan and Germany. In recent years, India has been experiencing a
surge in commercial borrowing among its business sector. This influx of capital
is not only helping to fuel economic growth but is also helping to support small
businesses and entrepreneurs in the country.
In this blog post, we will be taking a look at the reality behind extra
commercial borrowing in India and how it can positively affect businesses and
economies alike. We'll also be discussing the potential risks associated with
such borrowing as well as some tips for borrowers looking to gain access to this
kind of finance.
What Is Extra Commercial Borrowing?
Extra commercial borrowing is defined as the commercial banks' acquisition of
additional funds from the RBI through the Reserve Bank's daily refinance
operations. The commercial banks use these additional funds for purposes other
than meeting their reserve requirements. Banks may use these extra funds for
meeting the demands of their customers or for speculative purposes.
The RBI provides two types of refinance facilities to commercial banks - the
overnight and the term refinance facility. The overnight facility is available
on all working days, whereas the term facility is available only on certain
specified days. The main difference between the two facilities is that, under
the term facility, banks can borrow funds for a period of up to 7 days, whereas
under the overnight facility, they can borrow funds only for one day at a time.
Under both facilities, banks are required to set aside eligible government
securities equivalent to 25% of the amount borrowed as collateral with the RBI.
The rate of interest charged on both facilities is currently 5.15% per annum.
The Reasons For India's Extra Commercial Borrowing:
- India's extra commercial borrowing is mainly due to the country's high
- The government has been trying to control the deficit by borrowing more
money from commercial sources.
- However, this has not been very successful and the government has had to
resort to extra borrowing to meet its expenditure needs.
- Some of the other reasons for India's extra commercial borrowing include
the need to finance infrastructure projects and developmental programmes.
- With a large number of infrastructure projects in the pipeline, the
government is likely to continue borrowing commercially to meet its funding
The Benefits Of Extra Commercial Borrowing
Extra commercial borrowing in India can be a great way to get extra funds for
There Are Many Benefits To Taking Out A Loan, Including:
- You can get the money you need quickly.
- Loans can be used for a variety of purposes, including expanding your
business, buying new equipment, or hiring new staff.
- Interest rates on loans are typically lower than credit card rates, so
you can save money on interest payments.
- You may be able to deduct the interest you pay on your loan from your
- loans can help you build your credit history and improve your credit
The Risks Of Extra Commercial Borrowing
Commercial banks in India are currently under pressure to increase their lending
to support the country's economic growth. This has led to some concerns that
banks may be taking on too much risk by borrowing more money than they can
safely lend out.
There Are A Few Potential Risks Associated With Extra Commercial Borrowing:
- Banks could end up with bad loans on their books if companies default on
their repayments. This could lead to serious financial problems for the
banks and could ultimately result in a financial crisis.
- If interest rates rise, it will become more expensive for banks to
service their debts. This could put even more pressure on them and make it
difficult for them to meet their obligations.
- Extra borrowing could lead to inflationary pressures in the economy. If
prices start rising too quickly, it could lead to an economic slowdown.
- There is also a risk that the Indian government could step in and impose
stricter regulations on the banking sector if it feels that banks are taking
on too much risk. This could limit the ability of banks to lend and could
have a negative impact on economic growth.
How to manage extra commercial borrowing:Assuming that you are referring to extra commercial borrowing by businesses
in India, here are a few tips on how to manage it:
- Understand your business cash flow:
This is the first and most important step. You need to have a clear
understanding of when your business generates income and when expenditure
occurs. This will help you plan your borrowing accordingly.
- Have a repayment plan:
It is important to have a clear plan for how you will repay the extra
borrowing. This will help you stay disciplined and avoid defaulting on
- Consider interest rates:
Interest rates on commercial loans in India can vary significantly, so it is
important to shop around and compare rates before taking out a loan.
- Manage your debt-to-equity ratio:
Be mindful of your debt-to-equity ratio - i.e., the amount of debt relative
to the value of your company's equity. Taking on too much debt can be risky
for your business, so it is important to keep this ratio in check.
- Monitor your credit score:
Your credit score is an important factor that lenders consider when
evaluating loan applications, so it is important to monitor it closely and
take steps to improve it if necessary.
India's extra commercial borrowing is an important topic to consider in order to
understand the current economic state of the country. To be able to make sound
decisions and handle any upcoming financial issues, it is essential for policy
makers and citizens alike to understand this issue from all angles. With its
significant role in helping India maintain macroeconomic stability, extra
commercial borrowing should remain a top priority when considering policies that
can support growth and stability in the Indian economy.
Written By: Manish Raghav, Advocate on Record
Managing Partner, Libra Juris LLP