India Factor Torpedoes Shipping Firms

Indian shipping companies are at a distinct disadvantage when it comes to raising loans abroad. This is because the 'India risk' factor gets accentuated further for Indian shipping companies, according to the Indian National Shipowners Association (INSA), the apex body of shipowners.

Even Indian shipping companies with a strong financial base and a good track record are only able to raise loans at 1.5 per cent to two per cent over libor. In contrast, established foreign companies are able to borrow at 0.75 to one per cent over libor, says INSA's 1996-97 annual review.

Sources in INSA said the 'India risk' factor is applicable to the entire gamut of Indian industry, and not just the shipping sector. In essence, this means that international leaders are not satisfied about India's credit worthiness. Consequently, they lend at much higher interest rates. In the case of shipping, they charge even higher rates due to the high risk nature of the industry, sources said. Shipping is governed by the vagaries of international trade. It is also affected by political uncertainty. Leaders always considered shipping as a high risk business and have sought higher return. Sources, however, concede that the state-owned Shipping Corporation of India (SCI) and the largest private player in the industry, Great Eastern Shipping Company, are relatively better off. The former because of the backing of the government and the latter due to a strong financial base.

 

However, companies like Varun Shipping, Tolani, Shreyas Shipping and Chowgule Steamships have to bear the brunt of the high interest rates along with the plethora of companies which own one or two ships.

Multi-activity shipping companies like Larsen & Toubro, Century Shipping are better placed. Lenders are disposed more favourably towards them as they perceive that the diversified nature of their activities will enable them to cope better with the fluctuations in the industry.

Indian companies receive no succour from the domestic market either.

"The interest cost on foreign exchange borrowings from Indian financial institutions is even higher, at 3 to 4 per cent over libor, while rupee loans, even at the present level of interest, become highly uncompetitive," the report points out.

The capital markets does not look upon the industry as too favourable either. Investors seek higher returns due to the cyclical and high risk nature of the industry. This in turn impairs the capacity to build reserves and raises the cost of equity.

"Due to the capital intensity in shipping investment, debt servicing constitutes 30 to 40 per cent of operating costs at shipping companies. High cost debt in consequence makes the project unviable," the review points out.

These, coupled with the restrictive ECB norms and the lack of a specific allocation under the overall ECB cap for shipping has led to a very difficult situation.

Indian ships carried only 27.8 per cent of Indian overseas cargo in 1995-96 against a record 40.7 per cent in 1987-88.