When it comes to borrowing external funds, there are no signs of corporate India facing any kind of slowdown. India Inc’s debt fundraising through overseas loans touched $25 billion in the first half of the current fiscal year, which is an all-time-high borrowing for a half-yearly period.

According to Reserve Bank of India (RBI) data, India Inc raised External Commercial Borrowing(ECBs)/Foreign Currency Convertible Bonds (FCCBs) worth $25.17 billion (both under the Approval and Automatic routes) in the April-September period. The borrowing is 53 per cent higher than the $16.48 billion that Indian entities raised during the comparable period last year.

In FY19, India Inc’s ECB fund-raising touched a historical high of $42 billion. The spurt in ECBs in the previous year is attributed to a liquidity crunch and high interest rates in the domestic market against stable exchange rates and attractive borrowing costs in the overseas market, and a host of rationalisation measures by the RBI, which enabled many corporates to access overseas funding.

Currently, the RBI's cap on the ECB lending rate is LIBOR plus 450 basis points, which means companies can borrow at an interest rate anywhere between 2 to 6.5 per cent, which is much lower than the domestic bank lending rates.

Also read: India Inc increasingly looks abroad for funds

Impact of RBI easing norms

“Liberalisation of ECB guidelines, and prudent and tighter single-group exposure norms by the RBI have possibly resulted in higher ECB volumes. The risk aversion of the Indian banking sector is also one of the major factors,” said Rajesh Parthasarathy, Managing Director of Mumbai-based GrowTrust Ventures Consultancy Pvt Ltd. The company offers business and advisory solutions on corporate finance, banking and treasury.

In July, the RBI permitted ECBs with minimum average maturity of 10 years from recognised lenders other than overseas branches or subsidiaries of Indian banks for working capital and general corporate purposes. It also allowed Non-banking financial companies (NBFCs) to use this route to raise external funds for on-lending for these purposes, which also contributed to the growth in overseas borrowing.

Among the sectors, financial services, which includes non-banking financial companies (NBFCs), housing finance companies (HFCs) and micro finance institutions (NBFC-MFIs), continues to be a major borrower this financial year. The sector, which has been hit by the liquidity crisis, accounted for 47 per cent of the total borrowings in the first half of this financial year.

Default impact

“The debt capital market in India does not have a large appetite for NBFCs anymore due to black swan kind of default events in the recent past. Risk aversion despite strong liquidity has led well-rated NBFCs to tap foreign currency bonds and ECB loans,” Parthasarathy said, adding that he is seeing more interest from NBFCs to explore overseas borrowing.

[A black swan is a rare event with very severe consequences. While it cannot be predicted beforehand, many believe it becomes obvious in hindsight].

The RBI’s October monetary policy report revealed that financial flows to the commercial sector have declined sharply, by around 88 per cent, in the first six months of FY20. The RBI’s recent report on scheduled commercial banks also showed that bank credit growth continues to be in single digits (8.9 per cent) for the fortnight ended October 25, against 14.6 per cent recorded for the comparable period last year.

In its recent report titled, ‘Resurgence in External Commercial Borrowings’, CARE Ratings said: “The rising trend of external commercial borrowings is likely to be sustained for the remainder of the current fiscal year. The favourable external conditions — in terms of low overseas interest rates and liquidity, are expected to prevail for the foreseeable future and could lead to higher borrowings by corporates from this source.”