India Inc showed less enthusiasm in tapping overseas markets for meeting funding requirements in January this year in the backdrop of rising interest rates in the offshore funding markets and recovery in domestic credit demand.

Funds raised by Indian corporates via external commercial borrowings (ECBs) at $540.464 million in January was about 70 per cent lower compared with the $1.8 billion mopped up in the same month last year.

By contrast, as per Reserve Bank of India data, non-food bank credit disbursed by scheduled commercial banks in India increased by 9.5 per cent year-on-year in January 2018, compared with an increase of 3.5 per cent in January 2017. ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities.

Moreover, funds mopped up by India Inc via ECBs in the reporting month was about 59 per cent lower, compared with the $1.3 billion raised in December 2017.

Lending rates

Bankers attribute this trend of slowdown in demand for ECBs and pick-up in credit from banks to interest rates overseas nudging up vis-à-vis domestic lending rates.

The Libor (London Interbank Offered Rate), which is used to price ECBs, has gone up in the last one year or so. For example, the six-months Libor has gone up from 1.31 per cent on January 2, 2017, to 1.96 per cent as at January-end 2018, and is currently hovering around 2.20 per cent. The overall ECB funding cost includes a spread over Libor and swap costs.

So, bankers feel that due to the rise in Libor and likely tightening in the overseas dollar funding market, the funding cost for mobilising resources via ECBs is going up.

That domestic lending rates turned soft in the last more than a year is underscored by the fact that between January 2017 and February-end 2018, State Bank of India’s one-year benchmark lending rate came down by 95 basis points to 7.95 per cent from 8.90 per cent.

However, with effect from March 1, 2018, India’s largest bank has increased its benchmark lending rate to 8.15 per cent from 7.95 per cent in view of pick-up in credit and rise in deposit rates.

The RBI’s sixth bi-monthly monetary policy statement has underscored that there are early signs of revival in investment activity as reflected in improving credit offtake, large resource mobilisation from the primary capital market, and improving capital goods production and imports.

“…Large distressed borrowers are being referenced for resolution under the Insolvency and Bankruptcy Code (IBC). This should improve credit flows further and create demand for fresh investment,” said the central bank.

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