Taper Off

India Inc. is going slow on raising funds through external commercial borrowings, or ECBs. In fact, data released by the RBI says the value and number of ECB approvals has touched a seven-month low in November with 36 approvals worth $277.8 million. This is not all. The overall picture is more disappointing with the cumulative value falling sharply by 32 per cent to $11,595 million during the April-November 2016 period, year-on-year. Compared to April-November 2014, the rate of fall almost doubled. "ECBs are coming down as investment cycles are not picking up significantly. Also, the month of November was possibly the peak period of uncertainty both domestically and globally. Moreover, whether these declining trends are sustainable or not still remains to be seen," says Bansi Madhavani, Analyst, Credit and Market Research, India Ratings & Research.

Lower requirement of capital expenditure has led to a drop in overseas borrowings. New investments projects have fallen by 35 per cent in the December quarter, quarter-on-quarter. The drastic fall is being seen as a consequence of the demonetisation drive. However, CMIE estimates suggest that considering the pre-demonetisation rate of new investment proposals, the quarter could still have ended with lower numbers than the preceding quarter.

Close to 60 per cent of ECBs were raised for general corporate purpose, working capital needs and import of capital goods, while only five companies raised money for new projects in November. Analysis of ECB data for the last seven months shows that approvals with maturity period of five years or below dominated the list at 30-40 per cent. The approvals with maturity period of 10 years or more stood at 8-15 per cent. Interest rates played a spoilsport too. "Globally, interest rates are going up and, domestically, they are going down, consequently pulling down their differentials and leaving little incentives to borrow from overseas," says Madhavani

ECBs are popular amongst the oil & gas entities, a trend visible over the last three-four years. But with the fall in the oil prices some oil companies have turned profitable, and this has lowered their requirements for funds. While this remains a conjecture, a recent trend also points towards some on-lending and sub-lending companies raising fund through this instrument.

Last November, the RBI had liberalised the ECB framework by increasing the limit for raising funds by Indian companies. It had also widened the ambit of financers to include long-term lenders like sovereign wealth funds, pension funds and insurance companies. "The regulator is trying to facilitate and augment the avenues of funding, but it may not be sufficient. It is a function of demand and capital expenditure requirements of the companies," Madhavani adds. Let's hope for a better year ahead. ~

@niti_kiran