Corporate fundraising shrinks in FY17 as capacities sit idle

Banks' incremental credit-deposit ratio at 22% in FY17; tepid numbers in bonds, ECBs and equities

Low demand for funds from eligible borrowers and bankers tightening purse strings over bad debts have led to the Indian corporate sector’s borrowing shrinking in 2016-17. Fundraising from equity markets, too, has been lower in FY17 over previous year. 

Even as bank deposits grew 13 per cent year-on-year (YoY) or over Rs 12 lakh crore to Rs 105 lakh crore in 2016-17 till March 3, bank credit grew only 3.7 per cent or Rs 2.66 lakh crore to Rs 75 lakh crore, according to data published by the Reserve Bank of India (RBI). While the overall credit-deposit ratio stood at over 71 per cent, the incremental credit-deposit ratio accounts for only 22 per cent of the incremental deposits this financial year so far.  

Bank credit growth to industry, which includes loans to large, medium, and micro and small enterprises, is down 5.3 per cent this financial year as on January 20, according to latest RBI data. Loans to large industries registered a fall of five per cent, YoY, while lending to medium industries declined 9.7 per cent and loans to micro and small industries 5.9 per cent in the same period.

Banks, which are flush with funds, are buying government securities. B Sriram, managing director, corporate banking group, State Bank of India, said there was still a wide gap between the amount of money that came through deposits and the loans disbursed. “The situation will correct when credit begins to pick up,” he added.  

While India Inc was relatively more active in the domestic bond market, in the external commercial borrowing its borrowings declined, and the net change in corporate borrowings from both these segments together is small. In the domestic market, the corporate sector has raised bonds of Rs 1.72 lakh crore in FY17 so far compared with Rs 1.29 lakh crore in 2015-16, according to Bloomberg data. This data excludes financial services firms. 

On the other hand, total external commercial borrowings (ECB) in the financial year so far has been $17.42 billion, lower than $24.37 billion and $28.4 billion raised in financial years 2015-16 and 2014-15, respectively. Firms with dollar earnings go to the ECB market as they have a natural hedge or those that have an appetite to keep borrowings unhedged considering a stable rupee where the interest rates are much lower than in India. Besides these borrowings, companies raised Rs 20,000 crore through rupee-denominated or Masala bonds in FY17.

SBI’s Sriram said only firms with credit ratings of ‘AA’ and above have been able to raise resources by issuing securities. These companies are expected to tap the market as part of their fundraising strategy, going forward.

Even commercial papers, which are used for raising working capital, are not seeing much activity. As on February 2017, total outstanding commercial paper maturing under one year stood at Rs 3.73 lakh crore, up just Rs 16,890 crore since February 2016.

Fundraising from the equity market, too, dropped from Rs 58,628 crore in FY16 to Rs 41,264 crore in FY17, with most of the money raised being from the IPO route. Rights issues and qualified institutional placements declined to Rs 7,024 crore in FY17 compared with Rs 23,597 crore in FY16. 

The reason why the corporate sector does not want to borrow is because it is not expanding capacity. According to the RBI, capacity utilisation of the manufacturing sector was 72.4 per cent at the end of the September quarter, marginally lower than in the previous quarter but a little higher than a year ago.

“Capacity utilisation has been hovering around 72 per cent for quite some time, deterring companies from raising additional capital,” said Soumyajit Niyogi, associate director, research, India Ratings & Research.

Corporate executives also agree. “There is no demand and hence no growth. Fundraising will remain subdued for some time till demand improves,” said Prabal Banerji, head of international finance at the Bajaj group.