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Submitted to: Kiran maam

Submitted by:

Name Roll no.

Jyoti baliya 01

Sumaiyya shiekh 12

Priti singh 13

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Acknowledgment

We are highly obliged to exhibit a blendof us sincere & hardly to KIRAN MAAM forher valuable guidance throughout the project.

We had a lot to learn some sphere ofexperience and some of knowledge the dos anddonts the darker sides and the lighter once.

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Index

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European Central Bank

HeadquartersFrankfurt am Main, Hesse,Germany

Coordinates50.1095N 8.6740E

Established 1 June 1998President Mario DraghiCentral bank of EurozoneCurrency EuroISO 4217 Code EUR Reserves 526 billion euro in totalBase borrowingrate

1.00%

Base deposit rate 0.25%Website www.ecb.intPreceded by 17 national banks

Introduction:

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The European Central Bankis the institution of the European Union (EU) thatadministers the monetary policy of the 17 EU Eurozonemember states. It is thusone of the world's most important central banks. The bank was established by theTreaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany. Thecurrent President of the ECB is Mario Draghi, former governor of the Bank ofItaly.The primary objective of the European Central Bank is to maintainprice stabilitywithin the Eurozone, which is the same as keeping inflation low. The GoverningCouncil defined price stability as inflation (Harmonised Index of Consumer Prices)of around 2%. Unlike, for example, the United States Federal Reserve Bank, theECB has only one primary objective with other objectives subordinate to it.

The key tasks of the ECB are to define and implement the monetary policy for theEurozone, to conduct foreign exchange operations, to take care of the foreignreserves of the European System of Central Banks and promote smooth operation

of the financial market infrastructure under the Target payments system and thetechnical platform (currently being developed) for settlement of securities inEurope (TARGET2 Securities). Furthermore, it has the exclusive right to authorisethe issuance ofeuro banknotes. Member states could issue euro coins, but theamount must be authorised by the ECB beforehand (upon the introduction of theeuro, the ECB also had exclusive right to issue coins).

On 9 May 2010, the 27 member states of the European Union agreed to incorporatethe European Financial Stability Facility. The EFSFs mandate is to safeguardfinancial stability in Europe by providing financial assistance to Eurozone Member

States.The bank must also co-operate within the EU and internationally with third bodiesand entities. Finally it contributes to maintaining a stable financial system andmonitoring the banking sector. The latter can be seen, for example, in the bank'sintervention during the 2007 credit crisis when it loaned billions of euros to banksto stabilise the financial system.

Although the ECB is governed by European law directly and thus not by corporatelaw applying to private law companies, its set-up resembles that of a corporation inthe sense that the ECB has shareholders and stock capital. Its capital is five billioneuro which is held by the national central banks of the member states asshareholders. The initial capital allocation key was determined in 1998 on the basisof the states' population and GDP, but the key is adjustable. Shares in the ECB arenot transferable and cannot be used as collateral.

Throughout 2011 various member states of the European Union showedthemselves to be increasingly unable to meet financial commitments. At its heart,the crisis of the European currency unit or ECU is similar to almost any other

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financial crisis, including the crisis of 2008. Key concepts to understanding thecrisis include collateral, assets, and liabilities.

The bank is based in Frankfurt, the largest financial centre in the Eurozone(although not the largest in the European Union). Its location in the city is fixed by

the Amsterdam Treaty along with other major institutions. In the city, the bankcurrently occupies Frankfurt's Eurotoweruntil its purpose-built headquarters arebuilt.

The owners and shareholders of the European Central Bank are the central banksof the 27 member states of the EU.

History

The European Central Bank is the de facto successor of the European MonetaryInstitute (EMI) The EMI was established at the start of the second stage of the EU'sEconomic and Monetary Union (EMU) to handle the transitional issues of states

adopting the euro and prepare for the creation of the ECB and European System ofCentral Banks (ESCB). The EMI itself took over from the earlierEuropeanMonetary Co-operation Fund (EMCF).

Wim Duisenberg, first President of the ECB.

The ECB formally replaced the EMI on 1 June 1998 byvirtue of the Treaty on European Union (TEU, Treaty ofMaastricht), however it did not exercise its full powersuntil the introduction of the euro on 1 January 1999,

signalling the third stage of EMU. The bank was the finalinstitution needed for EMU, as outlined by the EMUreports ofPierre Wernerand PresidentJacques Delors. Itwas established on 1 June 1998.

The first President of the Bankwas Wim Duisenberg, theformer president of the Dutch central bankand the European Monetary Institute.[3]

While Duisenberg had been the head of the EMI (taking over from AlexandreLamfalussy of Belgium) just before the ECB came into existence, the Frenchgovernment wanted Jean-Claude Trichet, former head of the French central bank,to be the ECB's first president.The French argued that since the ECB was to be located in Germany, its President

should be French. This was opposed by the German, Dutch and Belgiangovernments who saw Duisenberg as a guarantor of a strong euro. Tensions wereabated by a gentleman's agreement in which Duisenberg would stand down before

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the end of his mandate, to be replaced by Trichet, which occurred in November2003.

There had also been tension over the ECB's Executive Board, with the UnitedKingdom demanding a seat even though it had not joined the Single Currency.

Under pressure from France, three seats were assigned to the largest members,France, Germany, and Italy; Spain also demanded and obtained a seat. Despitesuch a system of appointment the board asserted its independence early on inresisting calls for interest rates and future candidates to it.When the ECB wascreated, it covered a Eurozone of eleven members. Since then, Greece joined inJanuary 2001, Slovenia in January 2007, Cyprus and Malta in January 2008,Slovakia in January 2009, and Estonia in January 2011, enlarging the bank's scopeand the membership of its Governing Council.On 1 December 2009, the Treaty ofLisbon entered into force, ECB according to the article 13 of TEU, gained officialstatus of an EU institution.

In April 2011, the ECB raised interest rates for the first time since 2008 from 1%to 1.25%,with a further increase to 1.50% in July 2011.

Future:

When German appointee to the Governing Council and Executive board, JrgenStark, resigned in protest of the ECB's bond buying programme, Financial TimesDeutschland called it "the end of the ECB as we know it" referring to its perceived"hawkish" stance on inflation and its historical Bundesbank influence.

Powers and objectives:

Euro banknotes

The primary objective of the European Central Bank is to maintainprice stabilitywithin the Eurozone, which is the same as keeping inflation low. The Governing

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Council in October 1998defined price stability as inflation of around 2%, a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euroarea of below 2% and added that price stability was to be maintained over themedium term. (Harmonised Index of Consumer Prices) Unlike for example theUnited States Federal Reserve Bank, the ECB has only one primary objective withother objectives subordinate to it. The Governing Council confirmed this definitionin May 2003 following a thorough evaluation of the ECBs monetary policystrategy. On that occasion, the Governing Council clarified that in the pursuit of

price stability, it aims to maintain inflation rates below but close to 2% over themedium term. All lending to credit institutions must be collateralised as required

by Article 18 of the Statute of the ESCB.

Authorities:

The key tasks of the ECB are to define and implement the monetary policy for theEurozone, to conduct foreign exchange operations, to take care of the foreign

reserves of the European System of Central Banks and promote smooth operationof the financial market infrastructure under the Target payments system and beingcurrently developed technical platform for settlement of securities in Europe(TARGET2 Securities). Furthermore, it has the exclusive right to authorise theissuance ofeuro banknotes. Member states can issue euro coins but the amountmust be authorised by the ECB beforehand (upon the introduction of the euro, theECB also had exclusive right to issue coins).In U.S. style central banking, liquidityis furnished to the economy primarily through the purchase of Treasury bonds bythe Federal Reserve Bank. The Eurosystem uses a different method. There areabout 1500 eligible banks which may bid for short term repo contracts of twoweeks to three months duration.The banks in effect borrow cash and must pay it back; the short durations allowinterest rates to be adjusted continually. When the repo notes come due the

participating banks bid again. An increase in the quantity of notes offered atauction allows an increase in liquidity in the economy. A decrease has the contraryeffect. The contracts are carried on the asset side of the European Central Bank's

balance sheet and the resulting deposits in member banks are carried as a liability.In lay terms, the liability of the central bank is money, and an increase in depositsin member banks, carried as a liability by the central bank, means that more money

has been put into the economy.European Financial Stability Facility:

On 9 May 2010, the 27 member states of the European Union agreed to incorporatethe European Financial Stability Facility.The EFSFs mandate is to safeguardfinancial stability in Europe by providing financial assistance to Eurozone MemberStates.

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The European Financial Stability Facility is authorised to use the followinginstruments linked to appropriate conditionality:

To provide loans to countries in financial difficulties, like in the event ofGreece.

To intervene in the primary and secondary debt markets. Intervention in thesecondary debt market will be only on the basis of an ECB analysisrecognising the existence of exceptional financial market circumstances andrisks to financial stability. Act on the basis of a precautionary programme.Finance recapitalisations of financial institutions through loans togovernments.The EFSF is backed by guarantee commitments from theEurozone Member States for a total of 780 billion and has a lendingcapacity of 440 billion. It has been assigned the best possible credit rating(AAA by Standard & Poors and Fitch Ratings, Aaa by Moodys)

Organization:Although the ECB is governed by European law directly and thus not by corporatelaw applying to private law companies, its set-up resembles that of a corporation inthe sense that the ECB has shareholders and stock capital. Its capital is five billioneuros which is held by the national central banks of the member states asshareholders. The initial capital allocation key was determined in 1998 on the basisof the states' population and GDP, but the key is adjustable. Shares in the ECB arenot transferable and cannot be used as collateral.

European Union

This article is part of the series:Politics and government of

the European Union

Parliament

Council of Ministers

European Council

Commission

Court of Justice

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Other institutions

Policies and issues

Foreign relations

Elections

Law

All National Central Banks (NCBs) that own a share of the ECB capital stock as of1 January 2011 are listed below. Non-Euro area NCBs are required to pay up onlya very small percentage of their subscribed capital, which accounts for the differentmagnitudes of Euro area and Non-Euro area total paid-up capital.[36]

NCBCapital Key

(%)Paid-up Capital

()

Nationale Bank van Belgi / Banque Nationalede Belgique 2.4256 180,157,051.35

Deutsche Bundesbank 18.9373 1,406,533,694.10Eesti Pank 0.1790 13,294,901.14Central Bank of Ireland 1.1107 82,495,232.91 (Bank of Greece) 1.9649 145,939,392.39Banco de Espaa 8.3040 616,764,575.51Banque de France 14.2212 1,056,253,899.48Banca d'Italia 12.4966 928,162,354.81K / Kbrs MerkezBankas(Central Bank of Cyprus)

0.1369 10,167,999.81

Banque centrale du Luxembourg 0.1747 12,975,526.42Bank entrali ta' Malta 0.0632 4,694,065.65De Nederlandsche Bank 3.9882 296,216,339.12sterreichische Nationalbank 1.9417 144,216,254.37Banco de Portugal 1.7504 130,007,792.98Banka Slovenije 0.3288 24,421,025.10

Nrodn banka Slovenska 0.6934 51,501,030.43Suomen Pankki - Finlands Bank 1.2539 93,131,153.81Total 69.9705 5,196,932,289.36

Non-Euro area:

(Bulgarian NationalBank) 0.8686 3,505,013.50

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esk nrodn banka 1.4472 5,839,806.06Danmarks Nationalbank 1.4835 5,986,285.44Latvijas Banka 0.2837 1,144,798.91Lietuvos bankas 0.4256 1,717,400.12

Magyar Nemzeti Bank 1.3856 5,591,234.99Narodowy Bank Polski 4.8954 19,754,136.66Banca Naional a Romniei 2.4645 9,944,860.44Sveriges Riksbank 2.2582 9,112,389.47Bank of England 14.5172 58,580,453.65Total 30.0295 121,176,379.25

European sovereign debt crisis:

From late 2009, fears of a sovereign debt crisis developed among fiscallyconservative investors concerning some European states, with the situation

becoming particularly tense in early 2010. This included euro zone membersGreece, Ireland and Portugal and also some EU countries outside the area. Iceland,the country which experienced the largest crisis in 2008 when its entireinternational banking system collapsed has emerged less affected by the sovereigndebt crisis as the government was unable to bail the banks out.

In the EU, especially in countries where sovereign debts have increased sharplydue to bank bailouts, a crisis of confidence has emerged with the widening ofbondyield spreads and risk insurance on credit default swaps between these countriesand other EU members, most importantly Germany. To be included in the

eurozone, the countries had to fulfill certain convergence criteria, but themeaningfulness of such criteria were diminished by the fact they have not beenapplied to different countries with the same strictness.

Causes:

The principal monetary policy tool of the European central bank is collateralizedborrowing or repo agreements. These tools are also used by the United StatesFederal Reserve Bank, but the Fed does more direct purchasing of financial assetsthan its European counterpart. The collateral used by the ECB is typically highquality public and private sector debt. The criteria for determining "high quality"

for public debt have been preconditions for membership in the European Union:total debt must not be too large in relation to Gross Domestic Product, for example,and deficits in any given year must not become too large. Though these criteria arefairly simple, a number of accounting techniques may hide the underlying realityof fiscal solvencyor the lack of same. In central banking, the privileged status ofthe central bank is that it can make as much money as it deems needed. In theUnited States Federal Reserve Bank, the Federal Reserve buys assets: typically,

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bonds issued by the Federal government. There is no limit on the bonds that it canbuy and one of the tools at its disposal in a financial crisis is take suchextraordinary measures as the purchase of large amounts of assets such ascommercial paper. The purpose of such operations is to ensure that adequateliquidity is available for functioning of the financial system.

Response to the crisis:

The first round of austerity in 2010 failed to stop Greece's rising debt, which isexpected to go up by 10% in 2011.

There are a variety of possible responses to the problem of bad debts in a bankingsystem. One is to induce debtors to make a greater effort to make good on theirdebt. With public debt this usually means getting governments to maintain debt

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payments while cutting back on other forms of expenditure. Such policies ofteninvolve cutting back on popular social programs. Stringent policies with regard tosocial expenditures and employment in the state sector have led to riots and

political protests in Greece. Another response is to shift losses from the centralbank to private investors who are asked to "share the pain" of partial defaults thattake the form of rescheduling debt payments.However, if the debt rescheduling causes losses on loans held by European banks,

it weakens the private banking system, which then puts pressure on the centralbank to come to the aid of those banks. Private sector bond holders are an integralpart of the public and private banking system. Another possible response is forwealthy member countries to guarantee or purchase the debt of countries that havedefaulted or are likely to default. This alternative requires that the tax revenues andcredit of the wealthy member countries be used to refinance the previous

borrowing of the weaker member countries, and is politically

controversial.Reluctance in Germany to take on the burden of financing orguaranteeing the debts of weaker countries has led to public reports that someelites in Germany would prefer to see Greece, Portugal, and even Italy leave theEuro zone "temporarily." Until recently, Greek Euro zone exit was rejected byGerman ChancellorAngela Merkel. The German government's current position is,to keep Greece within the euro zone, but not at any cost. If the worst comes to theworst, priority will be given to the euro's stability.

Bond purchase:

The ECB could, and through the late summer of 2011 did, purchase bonds issued

by the weaker states even though it assumes, in doing so, the risk of a deterioratingbalance sheet. ECB buying focused primarily on Spanish and Italian debt. Certaintechniques can minimize the impact. Purchases of Italian bonds by the central

bank, for example, were intended to dampen international speculation andstrengthen portfolios in the private sector and also the central bank.

The assumption is that speculative activity will decrease over time and the value ofthe assets increase. Such a move is similar to what the U.S. federal reserve did in

http://en.wikipedia.org/wiki/Angela_Merkelhttp://www.google.co.in/imgres?q=bond+purchases&um=1&hl=en&rlz=1R2ADFA_enIN462&biw=1192&bih=559&tbm=isch&tbnid=UNuxGQsnjO1nCM:&imgrefurl=http://www.vir.com.vn/news/business/banking-_-finance/commercial-banks-reduce-bond-purchases.html&docid=0T1PyH7htmpXfM&imgurl=http://tuoitrenews.vn/polopoly_fs/1.39567!/image/image.jpg_gen/derivatives/landscape_490/image.jpg&w=490&h=368&ei=HX4MT_n1DeyciAfq68DfBQ&zoom=1http://en.wikipedia.org/wiki/Angela_Merkel

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buying subprime mortgages in the crisis of 2008, except in the European crisis, thepurchases are of member state debt. The risk of such a move is that it coulddiminish the value of the currency.

On the other hand, certain financial techniques can reduce the impact of such

purchases on the currency. One is sterilization, wherein highly valued assets aresold at the same time that the weaker assets are purchased, which keeps the moneysupply neutral.Another technique is simply to accept the bad assets as long-termcollateral (as opposed to short-term repo swaps) to be held until their market valuestabilizes. This would imply, as a quid pro quo, adjustments in taxation andexpenditure in the economies of the weaker states to improve the perceived valueof the assets.

Loans to banks:

On December 21, 2011 the bank instituted a massive program of making low-interest loans with a term of 3 years and 1% interest to European banks acceptingloans from the portfolio of the banks as collateral. Loans totaling 489.2 billioneuros ($640 billion) were announced. Outside observers were optimistic that thisinitiative would serve as the functional equivalent of monetary easing and avertcollapse of the European banking system. The loans were not offered to Europeanstates, but government securities issued by European states would be acceptable

collateral as would mortgage securities and othercommercial paperthat can bedemonstrated to be secure. The program had been announced on December 8, 2011but observers were surprised by the volume of the loans made when it wasimplemented.

Foreign exchange operations:

On 22 September 2000, the ECB, together with the monetary authorities of theUnited States, Japan, the United Kingdom and Canada, initiated concerted

http://en.wikipedia.org/wiki/Sterilization_(economics)http://en.wikipedia.org/wiki/Mortgage_securitieshttp://en.wikipedia.org/wiki/Commercial_paperhttp://www.google.co.in/imgres?q=foreign+exchange+operation&um=1&hl=en&rlz=1R2ADFA_enIN462&biw=1192&bih=559&tbm=isch&tbnid=mlqGyIdWj-QVIM:&imgrefurl=http://www.foreignexchangeservice.co.uk/tag/canadian/&docid=UybOLQlFV-rCpM&imgurl=http://www.foreignexchangeservice.co.uk/wp-content/uploads/2011/01/Candian-Dollar-Foreign-Exchange-Rate-Continues-2011-at-US-Dollar-Parity.jpg&w=470&h=300&ei=rX4MT9zsMqyviQfrp9STBg&zoom=1http://en.wikipedia.org/wiki/Sterilization_(economics)http://en.wikipedia.org/wiki/Mortgage_securitieshttp://en.wikipedia.org/wiki/Commercial_paper

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intervention in the foreign exchange markets; the ECB intervened again in earlyNovember 2000.

What it includes:

Commercial bank loans, buyers credit, suppliers credit, securitized instruments

such as floating rate notes, fixed rate bonds etc., credit from official export creditagencies, commercial borrowings from the private sector window of multilateralfinancial institutions such as IFC, ADB, AFIC, CDC etc. and Investment byForeign Institutional Investors (FIIs) in dedicated debt funds.

The government has been streamlining and liberalising the ECB procedures inorder to enable the Indian corporate to have greater access in the financial markets.The RBI has been empowered to regulate the ECBs. ECB provide additionalsources of funds for the corporate and allows them to supplement the domesticavailable resources and take advantage of the lower interest rates prevailing in the

international financial markets.Purpose:

ECBs are being permitted by the government as an additional source of financingfor expanding the existing capacity as well as for fresh investments. The policy ofthe government also seeks to emphasize the priority of investing in theinfrastructure and core sectors such as Power, telecom, Railways, Roads, Urbaninfrastructure etc. Another priority being addressed is the need of capital for Smalland Medium scale enterprises.

What is not included under ECB

s Investment made towards core capital of an organization viz. investment in equity shares

convertible preference shares

convertible debentures

Instruments which are fully and mandatorily convertible into equity withinaspecified time are to be reckoned as part of equity under the FDI Policy

Equity capital

Retained earnings of FDI companies

Other direct capital (inter-corporate debt transactions between related entities)

Functions:

Since not all the EU states have joined the euro, the ESCB could not be used as themonetary authority of the eurozone. For this reason the Eurosystem (whichexcludes all the NCBs which have not adopted the euro) became the institution in

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charge of those tasks which in principle had to be managed by the ESCB. Inaccordance with the treaty establishing the European Community and the Statute ofthe European System of Central Banks and of the European Central Bank, the

primary objective of the Eurosystem is to maintainprice stability (in other wordscontrol inflation). Without prejudice to this objective, the Eurosystem shall supportthe general economic policies in the Community and act in accordance with the

principles of an open market economy.

The basic tasks to be carried out by the Eurosystem are:

to define and implement the monetary policy of the eurozone;

to conduct foreign exchange operations;

to hold and manage the official foreign reserves of the Member States; and

to promote the smooth operation of payment systems.

In addition, the Eurosystem contributes to the smooth conduct of policies pursuedby the competent authorities relating to the prudential supervision of creditinstitutions and the stability of the financial system. The ECB has an advisory rolevis--vis the Community and national authorities on matters which fall within itsfield of competence, particularly where Community or national legislation isconcerned. Finally, in order to undertake the tasks of the ESCB, the ECB, assisted

by the NCBs, has the task of collecting the necessary statistical information eitherfrom the competent national authorities or directly from economic agents.

Powers and objectives:

Euro banknotes

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The primary objective of the European Central Bank is to maintainprice stabilitywithin the Eurozone, which is the same as keeping inflation low. The GoverningCouncil in October 1998[9] defined price stability as inflation of around 2%, ayear-on-year increase in the Harmonised Index of Consumer Prices (HICP) for theeuro area of below 2% and added that price stability was to be maintained overthe medium term. (Harmonised Index of Consumer Prices)[10] Unlike for examplethe United States Federal Reserve Bank, the ECB has only one primary objectivewith other objectives subordinate to it. The Governing Council confirmed thisdefinition in May 2003 following a thorough evaluation of the ECBs monetary

policy strategy. On that occasion, the Governing Council clarified that in thepursuit of price stability, it aims to maintain inflation rates below but close to 2%over the medium term.[9] All lending to credit institutions must be collateralised asrequired by Article 18 of the Statute of the ESCB.[11]

the benefits of price stability are substantial (seebenefits of price stability).

Maintaining stable prices on a sustained basis is a crucial pre-condition forincreasing economic welfare and the growth potential of an economy .

the natural role of monetary policy in the economy is to maintain pricestability (see scope of monetary policy). Monetary policy can affect realactivity only in the shorter term (see the transmission mechanism). Butultimately it can only influence the price level in the economy.

Modes of raising ECBs

ECB constitutes the foreign currency loans raised by residents from recognisedlender. The ambit of ECB is wide. It recognizes simple form of credit as suppliers

credit as well as sophisticated financial products as securitization instruments.Basically ECB suggests any kind of funding other than Equity (considered foreigndirect investment) be it Bonds, Credit notes, Asset Backed Securities, MortgageBacked Securities or anything of that nature, satisfying the norms of the ECBregulations. The different borrowings and loans that come under the ECB roof are:

Commercial Bank Loans: These loans constitute the term loans taken bycompanies from banks outside India.

Buyer's Credit: Buyer's credit is the credit availed by the importers ofgoods/services from overseas lenders such as Banks and Financial Institutions for

payment of their Imports on the due date. This lending is usually based on theletter of Credit (a Bank Guarantee) issued by the importers bank, i.e., theimporters bank acts as a broker between the Importer and the Overseas lender forarranging buyers credit by issuing its Letter of Comfort for a fee.

Supplier's Credit

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Securitized instruments such as Floating Rate Notes (FRNs), Fixed Rate BondsFRBs) , Syndicated Loans etc.

Credit from official export credit agencies

Commercial borrowings from the private sector window of multilateral

financial institutions such as International Finance Corporation (Washington),ADB, AFIC, CDC,

Loan from foreign collaborator/equity holder, etc and corporate/institutions

with a good credit rating from internationally recognized credit rating agency

Lines of Credit from foreign banks and financial institutions

Financial Leases

Import Loans

Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds

External assistance, NRI deposits, short-term credit and Rupee debt

Foreign Currency Convertible Bonds

Non convertible or optionally convertible or partially convertible debentures.

Advantages of ECB:Benefits to the borrower:

Foreign currency funds: Companies need funds in foreign currencies for manypurposes such as, paying to suppliers in other countries etc that may not be

available in India. Cheaper Funds: The cost of funds borrowed from external sources at times worksout to be cheaper as compared to the cost of Rupee funds.

Diversification of investors base: Another advantage is the addition of moreinvestors thus diversifying the investor base

Satisfying Large requirements: The international market is a better option in caseof large requirements, as the availability of the funds is huge when compared todomestic market.

Corporate can raise ECBs from internationally recognised sources such as banks,

export credit agencies, suppliers of equipment, foreign collaborators, foreignequity holders, international capital markets etc.

Benefits to the economy:

As can be seen from the policies formed to regulate the ECB, these borrowingshave some apparent benefits for the economy. The government through these

policies is trying to nourish 2 sectors:

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Infrastructure

SME

The policies do not require any approval for investment under a limit in these 2sectors. Thus it is easy to acquire foreign loans for such enterprises. Apart from

that, the low cost of funds in the global market provides the small and mediumenterprises funds at low costs thus bringing in more money in these sectors.

Benefits to the investor:

ECB is for specific period, which can be as short as three years

Fixed Return, usually the rates of interest are fixed

The interest and the borrowed amount are repatriable

No owners risk as in case of Equity Investment

Also, we can see that Indias debt management policy has significantly improved

over the years.Thisis reflected in various external debt indicators. The debt serviceratio, which is the ratio of external debt to the GDP of the country and is anindicator of an economys debt servicing capability, has improved, dropping to17.4 per cent in March 2005 as compared to 38.7 per cent in end-March, 1992.It isnoteworthy to mention that debt owed to the International Monetary Fund (IMF)was fully extinguished by 2000-01.

Decisions-making bodies of the ECB

Jean-Claude Trichet, the second President of the European Central Bank.

The Governing Council comprises the members of the Executive Board of theECB and the governors of the NCBs of the euro area countries.

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The Executive Board is responsible for the implementation of monetary policydefined by the Governing Council and the day-to-day running of the bank. In this itcan issue decisions to national central banks and may also exercise powersdelegated to it by the Governing Council. It is composed of the President of theBank (currently Mario Draghi), a vice president (currently Vitor Constncio) andfour other members. They are all appointed for non-renewable terms of eight years.They are appointed "from among persons of recognised standing and professionalexperience in monetary or banking matters by common accord of the governmentsof the Member States at the level of Heads of State or Government, on arecommendation from the Council, after it has consulted the European Parliamentand the Governing Council of the ECB". The Executive Board normally meetsevery Tuesday.

The General Council is a body dealing with transitional issues of euro adoption, forexample fixing the exchange rates of currencies being replaced by the euro

(continuing the tasks of the former EMI) It will continue to exist until all EUmember states adopt the euro, at which point it will be dissolved It is composed ofthe President and Vice President together with the governors of all of the EU'snational central banks.

Fulfilling the ECBs mission:

The ECBs mission is to keep inflation low and stable. To achieve this goal, itclosely follows economic developments in the euro area and seeks to influence thestate of the economy through its decision-making. The ECB has three bodies whichtake all the decisions in this respect:

the Governing Council, the Executive Board, and

the General Council.

The General Council will exist only as long as there are EU Member States whichhave not yet adopted the euro as their currency. Both the decision-making

procedures and the various tasks are specified in the Statute of the EuropeanSystem of Central Banks (ESCB Statute).

Centralised decision-making:

The ECB is the centre of decision-making in the Eurosystem. Thus, the GoverningCouncil, the Executive Board and the General Council of the ECB each take all thedecisions necessary to enable the Eurosystem and the ESCB to carry out theirrespective tasks. This includes the formulation of policies, such as the monetary

policy for the euro area, but also how they should be implemented.

Principle of decentralisation:

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The ESCB Statute does not specify who should implement the ECB's policies anddecisions: the ECB itself or the national central banks. Article 12.1 states merelythat the ECB should have recourse to the national central banks (NCBs), where

possible and appropriate, to carry out operations.

This principle of decentralisation should not be confused with the "principle ofsubsidiarity", as set out in Article 5 of the Treaty on European Union. Subsidiaritymeans that the need for centralisation must be proven conclusively before action atUnion level can be taken. In Stage Three of Economic and Monetary Union,however, monetary policy is conducted exclusively at Union level - under theauthority of the ECB's Governing Council. Therefore it is centralised by definitionand does not need to be justified. Instead, it is for the ECB to evaluate the extent towhich decentralised implementation is possible and appropriate.

Decentralised operations:

For the bulk of the Eurosystem's activities, there is indeed a division of labourguided by the principle of decentralisation.

The NCBs perform almost all operational tasks of the Eurosystem. In particular,they carry out the monetary policy operations and, as agents of the ECB, mostforeign exchange operations, provide payment and securities settlement facilities,and ensure the procurement, issue and post-issue handling of euro banknotes. Theyalso collect statistics for the ECB, collaborate with the ECB on translation and the

production of publications and contribute to economic analysis and research.

By contrast, the ECB carries out few operations while it oversees all of them, inorder to ensure that the operations of the Eurosystem are performed consistently bythe euro area NCBs.

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CONCLUSION

External Commercial Borrowings are increasingly becoming an important sourceof financing for the Indian companies. This can be attributed to the fact that Indiancompanies have increased their global footprint, thus producing the need of

possessing foreign currency funds. Also, lower interest rates outside provide anopportunity to pick up funds at lower costs. But nothing comes without any perils.With the increase in External Commercial Borrowings by corporate Indias

external debt increases and this has to be matched with growth of foreign exchangereserves in the country so as to maintain solvency. Also increase in ECB brings therisk of depreciation in rupee, which will lead to increased burden on the borroweras the value of the rupee depreciates. As the global markets tumbled in therecession, the borrowings from them were also impacted. The analysis shows adrop in ECBs during recession. Also, due to recession, we saw a significant impacton the reason ECB was taken by companies. There was a significant drop in ECBstaken for import of capital goods. The average lending period also saw an initialdip before stabilising. Lastly, we see the impact of the changes in policies

announced by the RBI. As can be seen, for the period of Jul-08 to Jun-10, the RBIannounced many policy changes, opening up the regulations and including moreand more sectors. The markets correctly responded to these announcements and wesee significant

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impact on the ECB due to these policy changes.