External Commercial Borrowings (ECBs), which were a preferred source of funds for Indian companies, have fallen out of favour this fiscal.
But domestic sources of non-bank finance such as corporate bonds and commercial papers have more than made up for the shortfall.
This surge in domestic debt issuance underscores the point made by RBI Governor Raghuram Rajan that a rate cut is not going to help much, as companies are increasingly tapping non-bank sources for credit, where lending rates have already moved lower.
No to foreign loans
Between April and July this year, $8.4 billion of ECBs were raised by Indian companies.
This is around 18 per cent lower than the sum raised from this source in the same period in 2014. ECB loans taken in the first four months of 2015 are the lowest since 2012.
The intense volatility in global financial markets this calendar is partly responsible for this decline. This has made hedging mandatory for all foreign currency loans and hedging costs have also spiked due to increased uncertainty.
According to Rakesh Valecha, Senior Director and Head – Credit and Market Research, India Ratings & Research, “The decline is a reflection of the domestic cost of borrowing becoming attractive compared to foreign currency borrowings on a fully hedged basis.”
According to the RBI, the average rate of interest for fixed-rate foreign loans was in the 0 to 5.25 per cent range this July, much below the 0 to 13.5 per cent range in 2014-15.
The fall in interest rates is also indicative of greater supply and falling demand for these funds. The lower off-take of ECBs is also due to the duress on corporate balance sheets and the fact that the better companies are turning to the local bond markets for their funding requirements.
Domestic debt issues soar Issue of debt by companies in local markets was, however, at record highs between April and July 2015. Companies raised ₹1,70,000 crore from issue of corporate bonds in this period; this is almost three times the amount raised in the same period last year.
This is also the highest sum raised through this source in recent years.
The bulk of these issuances has, however, been through the private placement route.
Commercial papers buoyant Commercial paper issuances were also buoyant in this period, with ₹5.77 lakh crore raised. This is about 54 per cent higher than the sum raised last year.
According to market experts, the surge in these issuances is due to the transmission of lower interest rates by mutual funds and bank treasuries to the borrowers.
Given that base rates on bank loans have remained sticky with reduction in rates being limited to 30-40 basis points, borrowers have preferred to raise funds through these non-bank routes.
“Commercial papers have largely been used to replace working capital borrowings from banks
“However, borrowings without adequate liquidity back-up could expose borrowers (especially in the A1 rating category) to risk of a default in the event of a rating downgrade or a disruption in markets,” warns Ind-Ra’s Valecha.
Due to recent developments, involving potential defaults by some borrowers, availability of funds from this market could become a challenge for those with poor ratings and borrowing costs could move higher for better-rated companies.
Valecha thinks that this could potentially reverse some credit flow back to banks, which have been finding it difficult to lend to the better-rated companies.
