NBFCs reduce overseas borrowing, turn towards domestic banks

A strong rupee, abysmally low interest rate and abundant liquidity in the overseas market offers a perfect recipe for strong overseas borrowing. This along with growing risk aversion among the domestic lenders should have ideally pushed more Indian corporates to borrow abroad. But that was not the case.

On the contrary, external commercial borrowings (ECBs) of India Inc, which was rapidly growing over the last few years, plunged to an 11-quarter low of $3.51 billion during the first quarter of the current fiscal as compared to $12 billion for the same quarter last year. This is a sharp drop from the quarterly high of $19 billion in Q4 FY20.

Also read: NBFCs’ better collections in Sept indicate recovery in some segments

NBFCs had emerged the largest category of borrowers in overseas market in the last two years as domestic funding sources dried up in the aftermath of the IL&FS crisis. But during the pandemic, lower demand amidst restricted activity and RBI’s special liquidity facility has resulted in these companies reducing ECBs. While mutual funds too cut back on the lending to the NBFC sector, domestic banks have helped bridge the gap, to some extent.

Historic high

Amid risk aversion in the banking system and tight liquidity in the Indian debt market post IL&FS crisis, ECBs have been one of the preferred routes of fund raising for Indian companies over the last 2-3 years. India Inc’s overseas borrowings more than doubled in the last five years to touch a historic high of $52 billion in FY 2019-20. (See Table 1.1)

In addition to ample global liquidity and favourable overseas interest rate environment, a slew of ECB rationalisation measures by the RBI such as allowing more sectors to tap overseas funding, expanding the end-use and maturity tenor of ECBs also fuelled this growth.

NBFCs on a borrowing binge

While ECBs are traditionally raised by manufacturing companies for long-term capital expenditure and expansion purposes, the financial services sector accounted for a substantial portion of ECBs raised over the last few years. The sector primarily includes NBFCs besides housing finance companies (HFCs) and micro-finance institutions (MFIs).

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The share of NBFCs in the overall borrowing accounted for 27 per cent ($ 11 billion) of the total ECBs raised in FY2018-19. It almost doubled to $21 billion in FY 2019-20 accounting for 40 percent of the total borrowing. (See Table 1.2) Higher risk aversion towards NBFCs given the asset-liability mismatches in many companies that was revealed post the IL&FS crisis, made banks reduce funding to this sector. This may have prompted these companies to look overseas for their funding needs.

Some of the major borrowers in the previous fiscal include government-backed NBFCs such as Power Finance Corporation, Indian Railway Finance Corporation, REC Ltd. Besides, commercial vehicle finance company Shriram Transport Finance Company and Muthoot Finance also tapped ECB to meet their on-lending requirements. (See Table 1.3)

IL&FS fiasco

A slew of high profile defaults such as DHFL, Altico Capital, Reliance Home & Commercial Finance and Reliance Capital in recent years have only made the situation worse. With mutual funds that had invested in the debt securities of these companies having to mark down their NAVs, funds have reduced their exposure to the shadow banking sector over the past year.

Mutual fund exposure to commercial papers (CPs) and non-convertible debentures (NCDs) fell by 32 per cent to ₹1.38 lakh crore as of July 2020 from ₹2.04 lakh crore for the same period last year. The exposure to NBFC sector was as high as ₹2.65 lakh crore in July 2018. (See Table 1.4)

For instance, bonds, as a percentage of total borrowings of Shriram Transport Finance Company (STFC) fell from 31.72 per cent in June 2018 to 22.03 per cent as of June 2020, while the share of CPs fell more sharply to 0.21 per cent from 6.09 per cent during the same period. On the other hand, foreign currency borrowing of STFC swelled from a mere 0.71 per cent in Q1FY19 to 17.77 per cent in Q1FY21.

Drop in ECBs

While the financial services sector still continues to be the highest borrower in the current financial year, the quantum of overseas borrowing has sharply come down. (See Table 1.5)

According to RBI data, NBFC borrowing fell by 71 per cent to $2.28 billion between April-July 2020 as against $7.82 billion during the same period last year. (See table 1.6)

Sluggish domestic demand due to the pandemic-led lockdown and halt in fresh lending by NBFCs during the moratorium period are some of the major reasons for the drop in NBFCs’ overseas borrowing during the current fiscal.

However, economists point out that a series of liquidity boosting measures and RBI’s frequent nudging of banks to lend more to the NBFCs have helped the liquidity-strapped sector to borrow more from the domestic market.

“While a sluggish demand scenario is one factor, one should also remember that well-rated NBFCs managed to borrow in the domestic bond market at lower rates through RBIs TLTRO operations,” said Madan Sabnavis, Chief Economist at CARE Ratings.

To address the liquidity concerns, RBI has conducted multiple tranches of the targeted long-term repo operations (TLTRO) to help corporates, cash-strapped NBFCs and microfinance institutions to raise money through issuance of bonds.

"The abundant liquidity in the domestic market, has enabled the higher rated borrowers to raise money at fairly attractive rates, without having to go through the cumbersome formalities associated with overseas borrowing. This is perhaps the bigger factor," said TT Srinivasaraghavan, MD, Sundaram Finance.

Bank credit

Risk aversion of banks towards the NBFC sector has also seemed to have come down. Although bank credit to the sector dropped to ₹7.93 lakh crore as of July 2020 from ₹8.07 lakh crore in March 2020, on a year-on-year basis exposure to the sector has gone up by 25 per cent from ₹. 6.36 lakh crore as of July 2019. (See Table 1.7)

“The RBI’s moratorium has just ended. Also, NBFCs and banks are going for restructuring of loans so therefore the basic demand for funds is also low,” Sabnavis said, adding, “one is expecting the demand to go up in the second half but that too is a wild guess.”

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