ECBs to pick up on the back of economic growth

ECBs dropped 39% month-on-month in February & recorded a drop of 18% y-on-y

Corporates’ fund raising through the external commercial borrowing (ECB) route, which recorded a drop in FY13, could see some action in the current financial year on the back of pick-up in economic activity, according to experts. The latest data available with the Reserve Bank of India (RBI) is for February, while the March data is expected soon. According to the data, ECBs dropped 39 per cent month-on-month in February and recorded a drop of 18 per cent year-on-year.

ECBs include loans from commercial banks, buyers’ credit, suppliers’ credit, securitised instruments, credit from official export credit agencies, and commercial borrowings from the private sector window of multilateral financial institutions. “The general business sentiment is subdued, and hence many corporates have deferred their capital expenditure plans. Several corporates wanted to raise money for the short-term, but since ECBs can only be availed for long tenors and for specific purposes, they have to approach the rupee market,” said Gyan Harlalka, managing director and head – markets (India), Royal Bank of Scotland.

According to Harlalka, the other reason is a lot of companies, including large corporates, had not hedged their ECB loans drawn earlier at lower dollar versus rupee levels, due to which they have seen an impact. Currently, the cost of hedging is quite high. But, the scenario is expected to improve this year. “We see a strong momentum in the ECB market due to attractive yield curve and keenness of Indian corporate to switch to low-coupon dollar loans,” said Ravi Shankar, managing director (investment banking), UBS Securities India.

Investment bankers are optimistic as they believe more projects may be approved for which companies will go for ECBs. “The outlook for the current fiscal year to March 2014 is positive as one hopes a possible economic pick-up will lead to more projects being approved. Besides, economic liberalisation and investor-friendly policies from the government augurs well for a pick-up,” said an official of JP Morgan.

According to the official, loans are generally preferred over bonds, which bear a withholding tax of 20 per cent. The withholding tax on loans can be lower, depending on where the funds are raised from.

The Street expects RBI to cut the repo rate by 25 basis points (bps) next month to 7.25 per cent. “If there is a cut by RBI in the repo rate next month and there are indications that there will be more cuts, then things will pick up. There is appetite for ECBs, but the business mood has to change,” said Harlalka.

The economy grew by 4.5 per cent in the October-December quarter of the previous financial year due to poor performance of farm, manufacturing and mining sectors.

The economy had grown by 5.5 per cent and 5.3 per cent in the first quarter and the second quarter, respectively, of FY13.

Finance Minister P Chidambaram said on Thursday the downturn in economy was temporary and growth would return to 8 per cent in two years.

However, International Monetary Fund’s latest World Economic Outlook report has trimmed India’s growth in 2013 to 5.7 per cent from previous estimate of 5.9 per cent.

Month	Amount Raised (in $) ECB
Feb 2013	2,132,961,959
Jan 2013	3,514,021,521
Dec 2012	1,146,268,043
Nov 2012	851,454,513
Oct 2012	4,244,332,760
Sept 2012	2,556,007,462
August 2012	2,268,808,000
July 2012	1,060,470,473
June 2012	1,865,451,059
May 2012	3,370,212,312
April 2012	2,602,042,030
March 2012	3,706,575,294
Feb 2012	2,604,167,487

^{Source: Reserve Bank of India}