Mumbai: Indian companies finding it tough to raise funds by selling bonds overseas are turning to the domestic loan market to finance expansion plans, where borrowing is expected to get cheaper and banks are willing to lend.
Reasonably sheltered up to now from turbulence stemming from the US subprime crisis, Indian firms are feeling the pinch in what is traditionally the season for raising funds in the overseas corporate bond market—the January to March period.
Uncertainty over how long India’s official lending rate will remain at its highest in several years is stopping companies from issuing bonds domestically, where in any case the market lacks depth and long-term investors like pension funds.
Instead they are tapping the loan market where preferred borrowers can command better rates and banks are well-stocked with cash put in circulation by increased government spending.
“The shift to bank loans is already taking place, as spreads overseas are widening,” Partha Mukherjee, president of treasury at Axis Bank said.
In August, India restricted how much firms could raise abroad and then repatriate, but some continued to borrow until about November to fund acquisitions and operations taking place abroad.
Demand for domestic loans was in any case rising as a result of the curbs, which limit firms to bringing $20 million (Rs79 crore) into India, but heightened volatility on international markets has spurred the shift.
“Spreads which were at 50-100 basis points six months back are now quoting at Libor (London interbank offer rate) plus 300-350 basis points,” said Jayesh Mehta, managing director and head of investor client coverage group at DSP Merrill Lynch Ltd.
For ICICI Bank Ltd’s liquid five-year bond, the spread has widened to about 440 basis points above the five-year US treasury from 350 basis points in early December.
Central banks in the US and Britain have lowered interest rates to shore up growth and soothe market volatility, but Mehta said the wider spreads kept costs high.
“From that point of view, even with the lower rate of interest, it is still expensive,” he said.
In 2007, Indian companies raised $8.3 billion via overseas debt, compared with $2.9 billion the year earlier, according to Thomson Financial.
But high spreads and low investor risk appetite has dried up the flow and there were no issues last month, Thomson data shows.
The Reserve Bank of India has left its key lending rate steady at 7.75% since March last year and shows no sign yet that it is ready to ease.
But many do expect its next move to be down, making issuers unwilling to sell bonds at current levels. RBI is also keeping cash conditions liquid so that money market rates have eased close to the floor of its 6.0-7.75% rate corridor.
As a result, local lending rates are already heading lower, with banks competing fiercely to fund expansion in the fastest growing major economy in the world after China.