The Hindu Business Line : Borrowed glory?

The hardening trend in domestic interest rates that started in the latter part of last year is hardly causing borrowers to sweat. Despite banks following the lead of the Reserve Bank of India's spikes in repo rates, the hikes in lending rates have been marginal and from a relatively low base following a sustained rate decline over the previous years. But what has provided more cushion is the fact that corporate borrowers have had access to cheaper funds from global lenders. According to the data for the current year, Indian firms raised Rs 35,135 crore through equity, debt and hybrid issues. Just how accessible such funds had become was evident from the fact that this amount was raised in five months compared to the Rs 34,375 crore over the whole of 2005. In a reversal from the past, Rs 29,000 crore was raised as debt, through Foreign Currency Convertible Bonds, suggesting the goodwill that these firms enjoy abroad. So much so, Indian companies turned out to be the biggest borrowers through the FCCB route in Asia.

One would be excused for assuming that only large Indian firms with track records of previous borrowings were favoured by the global market. But recent data suggest that small and medium enterprises also took to the External Commercial Borrowings route successfully. One foreign bank operating in India reported that ten per cent of its corporate borrowers used the ECB route and the number, other bankers feel, is set to grow. Confident foreign exchange liability management and a healthy export performance that provides a natural hedge against exchange risk have enabled many SMEs access the ECB route. This is well reflected in a sustained surge in private sector ECBs across a range of industry, from real-estate to engineering. June saw more than $1 billion flow into the corporate kitty and total ECBs may well exceed $15 billion by the end of December. But more than the numbers, it is the type of borrowers that suggests the changes sweeping the Indian economy. Auto-ancillaries, pharmaceuticals, textiles, food chemicals and food processing constitute some of the country's core export engines; real-estate firms have also made an entry into the ECB market.

The ramp-up in external borrowings may spell disquieting news for the domestic financial system that has to confront competitive global lending rates with an eye on margins; but the fact that credit offtake, both from domestic and global markets, is rising, despite hardening interest rates reflects a healthy aspect of Indian industry. Since 2002-03, capital expenditure by Indian firms has been rising; it peaked in 2004-05. Studies by the Reserve Bank of India show this cycle of project investment to be the most sustained in a long time. But the rising fuel and food prices, if unchecked, could spoil the party by dampening effective demand and economic growth. The current dream run in global borrowings could then cost the exchequer dear.

More Stories on : Editorial | Interest Rates

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Trouble in the neighbourhood

Jobs more important than growth

Borrowed glory?

Needed, macro-remedies for agriculture

Wet lease for those wet behind the ears

Guidelines for the media

Science and politics

Implementing bans

Non-fuel retailing