India Inc set to beat last year’s external commercial borrowings record

Indian corporates raised external commercial borrowings (ECBs) of $32.74 billion in the first three quarters of the current financial year.

In value terms, the borrowing is close to 80 per cent of the total ECBs raised in FY19, when external borrowing touched a historic high of $41 billion. From the looks of it, that record will be broken this year.

“Overseas lenders are willing to back highly rated Indian borrowers. The RBI’s liberalised overseas borrowing norms have helped expand this avenue of liquidity,” said Rajesh P, Managing Director of Mumbai-based GrowTrust Ventures Consultancy.

A welcome trend is the increasing number of ECBs from MNC parents to support their Indian operations, including capex and long-term working capital, he added.

The spurt in ECBs in the previous fiscal can also be attributed to a borrowing spike of $12 billion in March 2019 led by big-ticket transactions by UK-based ArcelorMittal ($5 billion), Reliance Industries ($1.5 billion) and Reliance Jio Infocomm ($750 million).

Year-on-year, India Inc’s ECBs grew nearly 40 per cent during the April-December period. Domestic entities raised close to $23.66 billion in the first nine months of FY19.

The financial services sector, which was severely hit by the liquidity crisis after the IL&FS fiasco, continues to be the major borrower of offshore loans. The sector raised about $14.35 billion, or 44 per cent of the total ECBs in the April-December period. Borrowers under this category include non-banking finance companies (NBFCs), housing finance companies (HFCs) and micro finance institutions (MFIs).

“On the domestic yields front, compared with the high yields seen by NBFCs in November 2018 (9.2 per cent), the yields have been 84 basis points lower in December 2019, while HFCs’ yields moderated by 197 bps in December 2019 compared with 9.33 per cent in November 2018. Similarly, yields have moved down for all categories,” said Sanjay Agarwal, Senior Director, CARE Ratings.

Other sectors

The financial services sector was followed by warehousing and support activities ($2.6 billion), electricity, gas and steam supply ($2.2 billion), and basic metal manufacturers ($2 billion).

However, the monthly volume of ECBs has come down over the last few months. While domestic entities raised ECBs in the range of $3-5 billion every month in the first two quarters, this has declined to $3.4 billion in October, $2.11 billion in November and $2 billion in December, the lowest in the last 12 months.

“There has been a reduction in interest rates and an increase in the available liquidity. Furthermore, government measures to increase the flow of liquidity to domestic institutions have also borne fruit,” said CARE’s Agarwal.

“With all these measures, liquidity in the domestic system is higher, while interest rates have trended lower resulting in reducing the preference of ECBs compared to domestic borrowings,” he added.

However, experts also feel that the dip in ECBs is only temporary and domestic entities will continue to tap overseas markets in the coming months.

“The rising trend of ECBsis likely to continue in the next financial year for reasons such as NBFCs being keen to diversify funding sources, MNCs increasingly using the ECB route, and a possible revival in capex,” GrowTrust’s Rajesh added.