ECBs see sharp fall in June and July, indicating slowing demand

The weakness extended to the corporate bond market as well, where outstanding bonds were up 15% on a year-on-year basis as on 30 June


Foreign borrowing has also dropped as domestic borrowing has become cheaper following a spate of rate cuts by the central bank, say some analysts. Aniruddha Chowdhury/Mint
Foreign borrowing has also dropped as domestic borrowing has become cheaper following a spate of rate cuts by the central bank, say some analysts. Aniruddha Chowdhury/Mint

Mumbai: Indian companies’ foreign borrowings in June and July were sharply less than a year ago, the first time they declined in two consecutive months in at least a decade, indicating slowing demand.

External commercial borrowing (ECB) issues in July 2016 were $1.2 billion, against last July’s $2.14 billion, Reserve Bank of India (RBI) data showed. In June, companies borrowed $872 million through ECBs, against $3.16 billion a year earlier.

Brokerage Jefferies India Pvt. Ltd said this is the first time in 13 years that such a dip has been seen in two consecutive months. The weakness is most likely due to a fall in demand for capital, Jefferies analysts said in a report on Monday.

The weakness extended to the corporate bond market as well, where outstanding bonds were up 15% on a year-on-year (y-o-y) basis as on 30 June, compared with a growth of 21% a year ago, according to the report.

New bond issuances were up 6% y-o-y at the end of the first quarter of this fiscal, against a growth of 106% seen last year, the report said.

“Commercial paper (CP), too, has seen a weakening in growth and issuances with a weaker demand cycle and falling rate regime,” Jefferies analysts Nilanjan Karfa and Anurag Mantry said in their report.

Indian lenders, struggling to manage the level of bad loans on their books, have shied away from project financing over the last three quarters.

Due to the slowdown in corporate lending, bank credit growth has remained under 10% y-o-y for a very long time. As on 2 September, outstanding bank loans were at Rs72,23,135 crore, up only 9.9% from a year ago, according to fortnightly data provided by the central bank.

Some other experts, however, say while slow demand is one issue, foreign borrowing has also dropped as a result of domestic borrowing becoming cheaper.

“Due to a spate of rate cuts by the Reserve Bank over the last year and some pass-through by banks, domestic borrowing cost has reduced significantly. It doesn’t make much sense for companies to go abroad right now,” said Ashutosh Khajuria, executive director and chief financial officer at Federal Bank.

According to Khajuria, due to the coupled effect of low demand and cheaper domestic capital, Indian banks are not likely to raise lending rates in the near future, which means demand for ECBs is likely to remain subdued.

Another possible reason, according to a senior official from a public sector bank, is the drop in oil prices from a year ago. Oil companies use the ECB window extensively for short-term borrowing to cover their imports. “The lower prices, cheaper domestic borrowing and lower private investments are all acting in tandem and could be the possible reasons for the dip in ECBs. However, we must analyse more recent data to get a better trend,” the public sector banker said, speaking on condition of anonymity.

According to data available on Bloomberg, crude oil prices as on 31 July had dropped 26.5% on a y-o-y basis. As on Monday, the y-o-y drop had narrowed to 7%.

Private sector firms in India have been delaying expansion plans as a large number of them are struggling with a heavy burden of debt on their books. According to a 12 September report by Kotak Institutional Equities, fresh project financing is expected to be low as firms are looking at finishing pending projects and reducing leverage levels rather than taking new capital expenditure on their books.

“Total sanctions are extremely weak at 1.5% of FY16 loans of the banking sector. From peak levels, sanctions for FY16 are down 80% y-o-y, indicating growth prospects are largely unchanged for the year,” the Kotak report said.

Kafra and Mantry of Jefferies also noted that improvement in sanctions for new projects was largely limited to projects under Rs100 crore.

According to project finance data released by the central bank earlier this month, even though 61% of new projects are being financed by banks and financial institutions, their contribution to the total sanction pipeline is a mere 8%. However, not everything is gloomy in the project finance space, as there has been a small rise in new projects with ticket sizes of Rs100-1,000 crore. This is “a data point that needs to be closely monitored,” the Jefferies report said.

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