The Hindu Business Line : SMEs opting for ECB route to raise funds

Capital mobilisation
There is a cost advantage that this route offers over rupee borrowings in India
SMEs with export earnings will have an advantage of natural hedge against foreign exchange risk

Mumbai , Aug. 28

Small and medium enterprises (SMEs) are increasingly opting for the external commercial borrowings (ECB) route to raise funds.

SMEs raising capital through ECBs is a growing trend, given the current rising interest scenario, especially those SMEs that are export-oriented find it economically more viable to raise funds overseas, bankers said.

Growing trend

"So far in this fiscal, 15-20 per cent of the deals for SMEs have been through ECBs. Last year, it was almost negligible," said Mr Vijay Chandok, General Manager, Small and Medium Enterprises, ICICI Bank. Currently, loans to SMEs through ICICI Bank are around Rs 15,000 crore.

"In the rising interest rate scenario, if the exchange rate equation is favourable then SMEs look for raising money overseas," said Mr Chandok.

"This is an emerging trend and about 10 per cent of our customer base in SMEs borrow using the ECB route. We expect this number to grow," said Mr Sanjeev Paul, Regional Head-Local Corporates, India & South Asia, Standard Chartered Bank. SMEs/Middle market is about one-sixth of the bank's Indian balance sheet.

"There is a cost advantage that this route offers over rupee borrowings in India. Even on a fully hedged basis the cost advantage for an SME could be 50-100 basis points," he said.

"Also the increasing comfort of Indian companies to take on and manage FX liability has encouraged the ECB route to fund capital expenditure."

SMEs, which are export-oriented, find it favourable to borrow capital through ECBs. "Those SMEs with export earnings will have an advantage of natural hedge against foreign exchange risk," said Mr D. Thyagarajan, Director, SME Ratings, Crisil Ratings.

More sectors

According to banks, this trend will be seen extensively in sectors such as auto ancillaries, textiles, pharma, chemicals and food processing, mainly companies engaged in exports to a large extent.

"As India becomes more export-competitive purely from a manufacturing competitiveness perspective, the companies will have a natural hedge (by way of export income) to take care of FX risk which comes with ECB borrowings — making ECBs more attractive," said Mr Paul.

Banks also feel that the trend is likely to continue because more SMEs are investing overseas. The SMEs investing abroad have a use for dollars/other hard currencies, said Mr Paul.

Through partnerships

"Increasing number of SMEs are investing abroad through joint ventures and partnerships," said Mr Shankarnarayan R. Rao, Executive Director, Export-Import Bank of India.

"Some SMEs, which are export-oriented find it easy to borrow through ECBs due to exchange rate comfortability," he said. Exim Bank's total SME portfolio is worth Rs 2,700 crore, he said.

It contributes roughly 20 per cent to their income.

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