Firms grapple with rate hike

Seshadri Rao, the finance director of the Jindal group, is worried. The unexpectedly strict monetary tightening measures by the Reserve Bank of India have come at a time when Rao has to raise Rs 3,500 crore for the group's power project in Rajasthan and another tranche of Rs 650 crore as a rupee loan for the expansion of its Jindalnagar-based steel project.

"The rising interest rates are a matter of great concern as the rates have shot up by 3 per cent in the last few quarters... we may have to go for yet another overseas loan as the local rates are very high," Rao said.

"It is the quantum and frequency of hikes which are making us look for alternative financing options abroad," said Rao. He has already begun scouting for the best rates abroad and says that Indian companies are expected to raise at least 70 per cent of their fund requirements in FY08 abroad while the rest would come from internal accruals and local banks. In 2006-07, corporate India raised Rs 68,900 crore by floating domestic corporate bonds as compared with Rs 59,700 crore raised in the previous fiscal. Nearly 65 per cent of India Inc's fund requirements were met from foreign sources at Rs 125,000 crore in FY07.

"There are many options open to companies now, such as mutual funds, infrastructure funds, insurance or pension companies apart from overseas loans," said Y M Deosthalee, chief finance officer of Larsen & Toubro. L&T will raise $250 million in FY08.

ICICI Bank's Deputy Managing Director, Chanda Kocchar said external commercial borrowings would double in FY08 from $18 billion raised in FY07. "We have helped more than 100 companies raise more than $9 billion in the last 12 months. This number is growing at over 100 per cent per annum and is expected to more than double in 2008," she said.

What is worrying companies more than the rate hike is the expected slackening of demand in the economy. Said D D Rathi, CFO of the Aditya Birla group company, Grasim, "We are a cash- surplus company. We are apprehensive about the overall impact of the rising rates, which would hit the mid- and small-cap companies which, in turn, will affect the demand of our products such as cement," he added.

The automobile companies, say analysts, would take the maximum hit as the hike in the loan rates could soak up the demand for cars and commercial vehicles and pull the growth rates down. "If the growth rates fall to 15 per cent from the 30 per cent recorded in FY07, we would reach the tipping point of a slowdown," warned R Seshasayee, managing director of Ashok Leyland.