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India Inc’s overseas borrowing hit a fresh high in FY20. According to RBI data, Indian corporates raised around $45 billion in the form of external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs) between April 2019 and February 2020. The borrowing, in the first eleven months of FY20, has already exceeded the previous high of $41 billion raised in the whole of FY19.
Risk aversion in the Indian banking system, tight liquidity in the debt capital market, lower interest rates abroad and a slew of ECB rationalisation measures taken by the RBI have all contributed to the spike in overseas borrowings in the last two fiscals.
The financial services sector, which includes NBFCs, HFCs and MFIs, alone raised $18 billion (or 42 per cent) of the total borrowing. The sector is followed by electricity and gas ($6 billion), warehousing and support activities ($2.8 billion) and telecommunication sector ($2.3 billion).
“Mutual funds and other investors like pension funds and insurance have been cutting their lending to NBFCs sharply and hence they have to look for other avenues like ECBs,” said Rajat Bahl, chief rating officer, Brickwork Ratings.
Subdued credit growth
Although banks are still the single largest source of funding for businesses, bank credit growth has been subdued in recent years. The credit growth decelerated to an over five-decade low of 6.14 per cent in the fiscal ended March 31, 2020, as compared to 14.4 per cent in the corresponding period last year.
In its Monetary Policy Report in April, the RBI said that credit growth is likely to remain modest, reflecting weak demand and risk aversion. That appears to be the case. Despite the RBI’s attempts to encourage banks to lend by cutting the reverse repo rate twice, banks’ overnight deposit with RBI touched a new high of ₹7 lakh crore last week.
That apart, the central bank’s Targeted Long Term Repo Operation (TLTRO 2.0), which was tailor-made to provide liquidity to small and medium-sized NBFCs and MFIs, was given the cold shoulder by banks. The first tranche of TLTRO 2.0 received only 14 bids amounting to ₹12,850 crore as against the notified amount of ₹25,000 crore.
“The idea of TLTRO 2 was good but so far it has not picked up,” Bahl said, adding that, “one possible solution could be the RBI, instead of routing money through banks, has to buy NBFC bonds or the government has to give credit guarantee.”
In a study titled Foreign Capital Flows In FY20 CARE Ratings said, “Borrowings from external sources by way of ECBs may go up aided by reduced cost of borrowing elsewhere as central banks across countries have slashed their policy rates and have undertaken various measures to improve liquidity in the system resulting in lower interest rates.”
However, it also added that, “A lot depends on whether or not Indian companies will be in a position to borrow given that the extended lockdown has impacted the scope of business, especially investment. A concern here will also be the ability to service debt.”
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