Growing demand for external commercial borrowing is a disturbing trend

For two successive years, registrations for external commercial borrowing have shot up. It is a trend the govt can't afford to ignore

India’s demand for external commercial borrowing (ECB) saw a huge jump last year. Data compiled by the Reserve Bank of India (RBI) shows that registrations for ECB in 2018-19 shot up by 45 per cent to $41.92 billion, compared to $28.87 billion in the previous year. Isn't this a cause for concern?

Remember that ECB registrations had declined in the three consecutive years from 2014-15. They fell by 14 per cent to $28.38 billion in 2014-15 and again dropped by another 14 per cent to $24.37 billion in 2015-16 and further declined by almost 10 per cent to $21.98 billion in 2016-17. 

The trend changed from 2017-18, when the ECB registrations shot up by 31 per cent to $28.87 billion. With a 45 per cent increase in ECB registrations in 2018-19, policy makers in North Block, headquarters of the finance ministry, should be as concerned over the trend as those in the RBI. 

It is to be noted that such data is based on applications made for ECB or foreign currency convertible bonds (FCCB), against which registrations are allotted during this period. This may not be the same as the actual amount brought into the country through the ECB route during the year, but it reflects the trend in the demand for such borrowings. Since this will be eventually captured in the country’s balance of payments with minor adjustments, the rising trend is an advance indication of the nature of pressure ECBs could put on India’s management of the external sector. 

A recent study by CARE Ratings has drawn attention to the many aspects of the sharp rise in the ECB registrations. Among the factors that need to be kept in mind, according to the CARE Ratings study, are: The relatively elevated levels of interest rates, before they began declining a bit, tightening liquidity in the domestic economy putting pressure on companies to look for external sources of financing, slowing activity in the corporate bonds market and the continued stress in the banking sector. 

But, as brought out by the study, there are quite a few other interesting trends in the rise in ECB registrations. The average maturity of the borrowings has seen a steady decline — from about 6.5 years in 2014-15 to 6.1 years in 2017-18 and further down to 5.22 years in 2018-19. Similarly, out of the total 1,012 registrations in 2018-19, only 17 had applied for borrowings above $500 million and these accounted for $18.1 billion of registrations. 

In other words, less than two per cent of the applicants had accounted for 43 per cent of the total borrowing amount registered last year. The skew appears even more pronounced if you note that over 95 per cent of the applicants had sought individual approvals for ECB below $250 million. And these accounted for just about a third of the total value of ECB registrations. 

In January 2019, the RBI had relaxed the guidelines for approval of ECB applications. These relaxations included an expansion in the list of eligible borrowers, raising the cap on such borrowings from $500 million to $750 million for all categories of applicants and up to $10 billion for oil marketing companies and reducing the minimum maturity period for such borrowings. 

Earlier, the minimum maturity period was three, five and 10 years, based on the purpose and quantum of the ECB. With the relaxation, the minimum maturity period was reduced to three or five years. The new guidelines, therefore, allowed Indian entities to borrow more under the ECB route and with a shorter maturity period. 

It is clear from both the registrations data and the policy relaxations that Indian companies find ECB to be an increasingly preferred and attractive route for meeting their financial needs. This may be a comment on the banking sector’s inability to meet the Indian corporate sector’s fund requirements on attractive terms and the tight liquidity situation in the domestic economy. But, as the study rightly points out, two risks cannot be ignored. 

The share of ECB in India’s total external debt of over $510 billion is on the rise — it was estimated at 37 per cent in September 2018. The reduced maturity period for ECB could adversely impact India’s overall external debt profile. Finally, the exchange rate fluctuations could be a big risk. The last five years have seen an annual rupee depreciation against the US dollar of around three per cent. There are no guarantees that the exchange rate would not fluctuate by a higher margin. While companies applying for ECB should always be on their guard, the government too should not be unmindful of the dangers of increasing reliance on such borrowings with external risks.