India Inc may reduce overseas borrowing

Indian corporate houses are less likely to raise funds through the ECB route in coming days, despite the Reserve Bank relaxing overseas borrowing norms, as Western banks are less willing to taking positions in emerging markets.

The falling rupee has reduced the appetite of corporates for External Commercial Borrowings (ECBs), as they fear a higher repayment burden. ECBs are already in tight supply, with swap rates pegged at Libor plus 4%.

Reserve Bank of India (RBI) data shows that external commercial borrowings by Indian corporates dipped to $3.71 billion in August from $4.16 billion in the previous month.

The trend is in sharp contrast to the first quarter, when domestic firms borrowed $8 billion, compared to $5.3 billion in the year-ago period, on the back of the low interest rates then prevailing in European economies.

"In the light of the lingering eurozone debt crisis, all European banks have less surpluses to lend to overseas corporate houses. Also, the spread has widened in the recent times, making fund-raising more expensive," Indian Overseas Bank Chairman and Managing Director M Narendra told PTI.

At present, the going rate for ECBs is the London Interbank Offered Rate, or Libor -- which is the international benchmark rate for loans -- plus 4%.

Some experts feel that risk aversion is another factor that will lead to a decline in ECB borrowing.

"In uncertain environments, European banks are risk- averse. So, they are less likely to take exposures to corporates in emerging markets, making it difficult for Indian industry to raise money through foreign banks," Crisil Chief Economist Dharmakirti Joshi said.

He added that the recent relaxation of the ECB norms may help the situation to an extent. "The easing... Will help in repayment of overseas borrowing obligations like foreign currency convertible bonds (FCCBs) and hordes of small savings that are due for redemption. But how it is going to help overseas borrowing will depend on the external environment, particularly in Europe."

Another reason for the falling appetite for ECBs is the cash pile that leading corporates are sitting on.

"A lot of people have enough cash, so they are not in a borrowing mood," Axis Bank President for Corporate Banking Nilesh Shah said.

Last month, the RBI increased the ECB limit under the automatic route by 50% to $750 million per year from $500 million earlier.

However, amid the sovereign debt crisis in eurozone economies, domestic companies are finding it difficult to raise money overseas.

The risk of rupee depreciation and the lack of a natural hedge are other factors restricting corporates, Narendra added.