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:

1. India's extra commercial borrowing is mainly due to the country's high fiscal deficit.
2. The government has been trying to control the deficit by borrowing more money from commercial sources.
3. However, this has not been very successful and the government has had to resort to extra borrowing to meet its expenditure needs.
4. Some of the other reasons for India's extra commercial borrowing include the need to finance infrastructure projects and developmental programmes.
5. With a large number of infrastructure projects in the pipeline, the government is likely to continue borrowing commercially to meet its funding requirements.

The Benefits Of Extra Commercial Borrowing

Extra commercial borrowing in India can be a great way to get extra funds for your business.

There Are Many Benefits To Taking Out A Loan, Including:

1. You can get the money you need quickly.
2. Loans can be used for a variety of purposes, including expanding your business, buying new equipment, or hiring new staff.
3. Interest rates on loans are typically lower than credit card rates, so you can save money on interest payments.
4. You may be able to deduct the interest you pay on your loan from your taxes.
5. loans can help you build your credit history and improve your credit score.

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:

1. 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.
    
2. 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.
    
3. Extra borrowing could lead to inflationary pressures in the economy. If prices start rising too quickly, it could lead to an economic slowdown.
    
4. 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:

1. 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.
    
2. 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 payments.
    
3. 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.
    
4. 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.
    
5. 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.

Conclusion
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