Firms go slow on external commercial borrowings

Softening of commodity prices have negated the need for raising foreign currency for many oil marketing companies and commodity importers

Low demand, leading to under-utilised capacity of the Indian corporate sector, is sapping its risk appetite for credit even from the cheaper international market, a sharp fall in external commercial borrowings showed.

Softening of commodity prices, particularly of oil, has also negated the need for raising foreign currency for many oil marketing companies and commodity importers.

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Funds raised through external commercial borrowing (ECB) and foreign currency convertible bonds (FCCB) in March fell to $1.52 billion, from $3 billion in December, a drop of 49 per cent in three months. In January, firms had raised $1.4 billion, and in February these had raised $1.35 billion, data released by the Reserve Bank of India (RBI) showed.

The fall was a contrast to the usual practice of a pick-up in borrowings at the start of the year. In December 2014, firms had borrowed $637 million, but in January 2015, the borrowing rose to $2.6 billion. In March 2015, the figure was $2.66 billion.

The fall in borrowing can be attributed to excess capacity of Indian corporate sector and currency volatility, said Soumyajit Niyogi, associate director at India Ratings and Research. He also pointed out that smaller companies were also raising money through venture capital and private equity route instead of using the ECB route. Excessive leverage of large companies have also satiated their appetite for further foreign borrowing, he said.

According to RBI’s capacity utilisation data, Indian manufacturing companies are only using about 71 per cent of their installed capacity, compared with a peak of 78 per cent in fourth quarter of 2012-13.

Jayesh Mehta, head of treasury at Bank of America-Merril Lynch, said the lower borrowing number was a reflection of the low credit appetite seen in the domestic market. Major borrowers from the foreign market are also absent because of the softening of commodity prices.

The banking system’s credit growth continued to remain anaemic. As on April 15, banking system’s credit grew only at 10.4 per cent, which is an improvement from its year-ago period’s 9.3 per cent, but still far lower than the 30-32 per cent credit growth the banking sector witnessed a couple of years ago.