India Inc is feeling the pinch as dollar liquidity dries up. With European banks retrenching, Asian competitors are picking up the slack. It’s nice to have options but Chinese funding is still seen as a last resort. Politically hard to swallow, it often comes with strings attached.
Anil Ambani’s Reliance Communications, India’s second-largest mobile phone carrier, has just raised funds from several Chinese banks to refinance $1.18 billion of outstanding foreign currency convertible bonds. At present, it is not clear if any strings are attached to this deal. However, Reliance also borrowed from China last March when China Development Bank arranged loans worth $1.93 billion. Those funds were used to finance the purchase of radio spectrum as well as equipment from China’s Huawei Technologies.
Though businesses may be wary of similar deals tied to purchase of Chinese equipment, they may have little choice. Surging interest rates at home prompted many Indian companies to raise $30 billion offshore last year. Many are exposed to currency losses after the rupee lost nearly 18 per cent of its value. What’s more, risk aversion among European banks has pushed up the cost and availability of offshore debt. Reliance is paying only five per cent for its loan.
The squeeze is most acute for firms such as Tata Steel and JSW Steel which will be looking to refinance existing debt. Some $7.8 billion of convertibles need to be redeemed or converted by the end of this year, according India Infoline. Given the plunge in the stock market over the past year, the bulk will have to be redeemed.
India Inc as well as policymakers won’t like having to rely on its more powerful neighbour across the Himalayas for funding, particularly since Chinese banks have an express mandate to advance the country’s national interest. On the other hand, any source of funding is better than running out of cash. What’s more, if Chinese banks subsidise loans that no one else will touch, they could be ones that end up feeling the pain.
