Even as fundraising in the domestic market continued to pose a challenge for non-banking financial companies (NBFCs), the overseas borrowing of such entitieswitnessed a 100 per cent jump in FY20.

A fresh high

According to RBI data, external commercial borrowings (ECB) of India Inc touched a fresh high of $51 billion in FY20. Financial services sector, which covers NBFCs, housing finance companies (HFCs) and microfinance institutions (MFIs), alone raised close to $21 billion or 40 per cent of the total borrowing.

In FY19, the sector raised close to $11 billion or 25 per cent of the $42 billion raised by Indian corporates.

“The availability of funds for NBFCs from the domestic market has been a challenge over the last two years. Mutual funds’ exposure to the sector has been shrinking and banks are unable to fill the gap. As a result, in FY20, larger NBFCs have been tapping overseas fundingthrough the ECB route as an additional source of funds,” said Vydianathan Ramaswamy, Director-Ratings, Brickwork Ratings.

“In the past ECBs have been used as a rate arbitrage, but now even without significant arbitrage they are being used as an additional funding source,” he added.

Post IL&FS crisis, NBFCs went through a period of tight liquidity crunch, which restricted their funding requirements and increased their cost of borrowing. Mutual funds, which have been a major investors in the debt papers of NBFCs, turned extremely cautious on the sector.

According to a CARE Ratings report, mutual funds withdrew over 50 per cent of their investments from the commercial papers (CPs) of NBFCs. The percentage share of funds deployed by mutual funds in CPs of NBFCs in March 2020 fell to 3.3 per cent of debt AUMs, which is lowest since July 2018 when it was 11.3 per cent. Mutual fund investments in corporate debt paper (bonds) also witnessed a decline during the period.

The rating agency also said that NBFCs have been shifting towards bank borrowings from market borrowing. The overall composition of NBFCs in bank credit increased from 6.2 per cent in July 2018 to 8.8 per cent in March 2020.

Bank exposure

Even the marginal increase in bank exposure to the sector is restricted to large and well-rated NBFCs, while small and mid-sized NBFCs are deprived of even this source.

“I think risk aversion by banks is a bigger problem than liquidity. Recently, the RBI started a special window for NBFCs. Liquidity in the banking sector is also in large surplus. However, banks are reluctant to lend to this sector due to the possibility of rising NPAs,” said Anagha Deodhar, Economist at ICICI Securities.

RK Gurumurthy – Head -Treasury, Lakshmi Vilas Bank, said the spike in overseas borrowing by NBFCs can be attributed to a slew of ECB rationalisation measures taken by the RBI in the previous year, along with a sharp decline in interest rates in the overseas market.

“In LIBOR terms, borrowers have been able to raise long term loans at least 50 to 75 basis lower than what they did in H1 last FY,” said Gurumurthy, adding: “Forward premia rates have been fairly stable in the Indian market, and so have been the currency’s exchange rates and these are some of the strong enablers.”

While the share of the ECBs in NBFCs’ borrowing mix has been increasing gradually in the last few years, experts caution that the borrowing trend may not be similar in the post-Covid world, and overseas investors will be a little more cautious with their exposures.

“The past two months have witnessed slowdown in economic activity due to the pandemic. Once the economic activities pick up, NBFCs may continue to tap ECBs depending on their funding requirement and also based on overseas investors interest and pricing,” said Brickwork Ratings’ Ramaswamy.