The stock market has been giddy with elation ever since the US dropped interest rates on 18 September. Its dramatic recovery from the scare of August has been the cynosure of all eyes. Few seem to bother about what is happening in the credit market, where the trouble started in the first place. Is that market, too, back on track? A lot depends on the answer, especially for Indian companies.

The signals are expectedly mixed. There are some signs that the pipeline carrying bond deals is no longer choked with fear. Last week, Suzlon Energy raised $200 million through convertible bonds—only the third such Asian issue since the markets started recovering, according to Finance Asia. The pricing seems tougher than before, but that is only to be expected. The fact that investors lined up to lend to an Indian company is noteworthy. There are also stray news items of companies announcing their intention of testing the global bond markets again.

Meanwhile, the prices of emerging market bonds, too, have started inching up again. This seems to be an improvement over early September, when credit rating firm Moody’s said that the cross-border bond market “has shut down".

Whereas, the International Monetary Fund (IMF) has warned in its new Global Financial Report, which was released on Monday: “Credit conditions may not normalize soon." And: “Corporations have, for the most part, been able to secure the financing they need to maintain their operations. However, the adjustment period is continuing and if the intermediation process stalls and financial conditions deteriorate further, the global financial sector and real economy could experience more serious negative repercussions."

Tata Steel may be one company that will be put to the test soon, according to Moody’s. Around $3.1 billion of its debt matures in the coming months, and will have to be refinanced. This debt was part of the bridge finance (or short-term loans) taken by Tata Steel when it bought Corus earlier this year. But Moody’s has also recognized the “banking support" that Tata Steel enjoys. In other words, if the bond markets are not willing, then the company’s bankers are likely to step into the breach and provide Tata Steel with the money it needs.

Indian companies have been soaking up money in large quantities from the global bond and credit markets over the past two years. This is part of a far larger trend—of companies bypassing banks and funding their growth with the help of alternative sources of money.

Here are the numbers. In 2006-07, bank credit to industry was Rs1,41,543 crore. External commercial borrowings were Rs88,472 crore. Corporate profits after tax (which is the internal pool of money) were Rs1,11,107 crore. That’s a far cry from the hoary old days when domestic banks financed most of the working capital and capital expenditure of Indian companies. The bigger and better companies have cut their dependence on banks over this decade, as it became easier for them to borrow abroad.

What this means is that even though banks are still the single largest source of funds for Indian companies, there are still at least two other founts of money that are close to bank funds in terms of their importance to Indian CFOs—global borrowing and internal resources.

One of these founts was frozen in August and is thawing very slowly. It could present a huge challenge to the corporate sector.

If the global bond and borrowings markets do not ease significantly in the months ahead, companies will have to figure out how to make up for the money they will be unable to borrow. Let me restate this in a more blunt fashion. Indian companies borrowed close to Rs90,000 crore last year from the global markets. It is likely that they may have to depend on domestic banks and their own balance sheets to fund their growth this year. Don’t be surprised if the rush back to banks pushes up interest rates, as demand for bank loans increases.

Bankers have an ugly word to describe the trend of companies bypassing them and raising money directly from investors—disintermediation. Will the global credit crunch push them back into the banking fold? And if it does, will this put increasing pressure on the domestic market for loanable funds, thus pushing up interest rates?

The return of large Indian companies to the domestic banking system could unsettle the local credit market. The “homecoming" of these 820-pound gorillas could squeeze out the smaller fellows. Small businessmen often complain that they anyway pay interest rates that are far in excess of the headline prime lending rates that banks charge their best customers. Things may just be getting worse for them.

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