Domestic turmoil may see ECB drawdowns sniffing at $35-40 bn

The ongoing risk aversion and the resultant liquidity crunch and spike in interest rates, coupled with recent relaxation of norms for drawing forex loans by the Reserve Bank will push up external borrowings to USD 35-40 billion this fiscal, up from USD 29 billion a year ago, says a report.

The continued turmoil in the domestic credit market has pushed up external commercial borrowings (ECBs) a massive 62 percent to USD 16.5 billion in the first half compared to USD 10.2 billion during the year-ago period and USD 28.9 billion for the whole of FY18, said Icra in a forecast.

It can be noted that the cash crunch at the infra lender IL&FS group and the subsequent defaults has roiled the credit market and the worst impacted are non-banking finance companies, which have seen credit supply drying up and their market valuations falling like nine pins.

"Amid the rising risk aversion of domestic investors and the tight liquidity conditions, companies are increasingly seeking to raise funds through overseas borrowings through the ECB (external commercial borrowing) route, which may push up such borrowings to a high of USD 35-40 billion this fiscal year. Already the same has soared 62 per cent in the first half of the year at USD 16.5 billion," Karthik Srinivasan, financial sector ratings head at Icra said in a note.

The spike in ECB approvals has been driven by relaxation in guidelines by the monetary authority in April, whereby it increased the all-in cost of ECBs, expanded the list of eligible borrowers which included housing finance companies, apart from expanding the overall list of end-use for such funds.

With a battered rupee, investor appetite for masala bonds has weakened and companies will have to raise borrowings in foreign currencies, he said, adding the aggregate cost of USD-denominated ECBs continue to move up driven by increase in the Libor rates, hedging costs and falling dollar liquidity.

"Despite these challenges, the overall costing still remains competitive against rupee funds and accordingly, we expect ECB approvals to pick up to USD 35-40 billion during FY19 from USD28.9 billion in FY18," he said.

His forecast is based on the ongoing trends and various measures taken by the RBI, including USD 10 billion borrowing permitted to be undertaken by oil companies.

The relaxation for oil marketing companies was announced in September after crude price crossed USD 85 a barrel roiling balance of payment situation and the steep fall in the rupee. The domestic unit is the worst performing among the emerging market peers and is down nearly 15 percent year to date. The rupee had plumbed to a historic low of 74.61 early October.

He further says this will have the overall domestic credit growth falling through the rest of the fiscal year.

"The overall credit growth from commercial papers, corporate bonds and bank loan is expected to moderate to 9-10 per cent for FY19 from 10.7 percent in FY18 and a high 12.9 per cent in September," he said.

This projected dip in credit growth is expected to be driven by a slowdown in growth in outstanding volumes of corporate bonds, commercial paper as well as a moderation in bank credit growth.