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Overseas borrowing of India Inc plunged to a two-and-half year low to $700 million in May as the more virulent second wave of the pandemic and gloomy demand outlook forced companies to stave off their capex and expansion plans to focus more on cost-cutting measures.
The external commercial borrowings (ECBs) in May were even lower than the $996 million raised in April 2020, when the country went under a stringent nation-wide lockdown. Prior to this, monthly ECB volumes hit a low of $540 million in January 2018.
Once a preferred mode
Amid risk aversion and rising interest rates in the domestic market, ECBs have become one of the preferred modes of fundraising for India Inc — especially the NBFCs — over the last few years before the onset of the pandemic. From $17 billion in FY17, ECBs of India Inc jumped to $41 billion in the next two fiscals and touched a historic high of $51 billion in FY20.
Overseas borrowings, however, fell to $35 billion in FY21. While the pandemic-induced economic slowdown, muted credit demand and absence of major expansion plans by corporates are among the major reasons, economic experts point out that companies are not only deferring fresh borrowings but also paying off their earlier loans to deleverage their balance sheets.
“Within the Balance of Payment account, under the ECB head, except for the Q4FY21, the debit side had been higher than the credit side. This also peaked in Q2, FY21 when the economic stress was probably at a maximum,” said Indranil Pan - Chief Economist, YES Bank, adding, “This indicates that with limited funds needed for any expansion purposes, companies probably favoured repaying the relatively higher cost ECBs taken earlier with the surplus funds already available with themselves.”
He also added that this has helped companies to strengthen their balance sheet by reducing the interest cost at a time when the top line growth was not on the expected lines.
For refinancing purposes
A compilation of purpose-wise ECB fundraising over the last few years also reflects this trend. According to RBI data, overseas fundraising for the purpose of 'Refinancing Rupee loans' and ‘Refinancing of earlier ECBs’ have gone up $6.05 billion in FY19 to $9.28 billion in FY20. In just two months into the current fiscal, Indian corporates have already raised $1.54 billion in ECBs for ‘refinancing’ purposes.
Even on the domestic front, the credit offtake remains abysmally low. According to RBI's data on sectoral deployment of bank credit, the non-food credit offtake has also been slower across most industries. On the financial year basis, as of May, the growth rate of credit off-take by all industries has been -1.2 per cent while services de-grew by 2.3 per cent.
“The Indian economy will not be able to take in its stride a stop-start momentum. This hurts the supply side dynamics and can have its implications on the fund requirement of the company,” YES Bank's Pan said, adding, “Future waves of Covid could also imply that the consumer confidence and hence demand remains low and hence expansion plans get put off.”
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