External commercial borrowings (ECBs) by corporate India declined sharply to $312 million in April, compared with a little over $5 billion in March and generally elevated levels for many months through the last two financial years (see chart).
A prolonged regime of very low interest rates that prevailed in the developed economies had given a fillip to overseas borrowings by Indian companies while the domestic bank credit remained tepid. However, monetary tightening by the West has now dampened the relative cost attractiveness of such loans for Indian companies. Also, the depreciation of rupee and its volatility have made the cost of forward cover higher.
With the US Federal Reserve likely to raise rates by 250 basis points (bps), the cost of ECBs will be higher over a sustained period, analysts said. They added that since domestic bank credit has turned robust, many companies have apparently started preferring to borrow from domestic sources.
The combined effect of the rising global interest rates and the rupee’s 3-4% depreciation on cost of ECBs for India Inc could be 200-300 bps on an annualised basis, according to Madan Sabnavis, chief economist at Bank of Baroda. He noted that the cost of bank credit in India may not grow as much the repo rate will climb in the year ahead, with the lagged and calibrated increases in the MCLR (marginal cost of funds based lending rate) by banks.
Sabnavis said that demand for funds from India companies will definitely increase in the coming years though it will be sector-specific to begin with. “It (demand for funds) will not be broad-based. Companies will invest where they see demand rising like those related to infrastructure growth including housing,” he said.
Having remained subdued over most part of the last two years, credit growth has improved in recent months. Non-food bank credit grew 11.3% on year in April, compared with 9.7% in the previous month and 4.7% a year before. However, loans to industry grew at a slower pace of 8.1% even on a marginally-contracted base.
The weighted average cost of ECBs had fallen steeply to 1.2% over London Interbank Offer Rate (LIBOR) in FY19. Though the cost increased subsequently, it still stood at 1.81% in FY22, relatively attractive against the MCLR of comparable tenures.
ECBs’ share in India’s external debt stood at around 37% at December-end 2021. ECB approvals stood at $38.3 billion in FY22, up from $34.8 billion in the previous fiscal year.
The companies that were aggressive on the ECB front in FY22 included Reliance Industries, Adani Green Energy, Adani Ports and SEZ, JSW Steel and Mumbai International Airport. State-run Indian Oil Corporation, REC, Indian Railway Finance Corporation, ONGC Videsh and NTPC also used the ECB route in a big way.