(Photo: Reuters)
(Photo: Reuters)

Surge of dollars into projects points to a broken domestic funding pipe

  • A large number of projects have been funded from offshore borrowings as banks and other domestic lenders remain reluctant to lend
  • In calendar year 2019, ECB inflows totalled $50 billion, nearly double from the previous year

There is good news for finance minister Nirmala Sitharaman, who is hard at work to convince lawmakers and citizens that India’s capex cycle is on the upturn. The country’s central bank has painted an optimistic outlook on private investment in the coming months.

“The investment cycle appears to be poised to gain momentum in the short to medium term, but, its sustainability needs to be watched closely," said the Reserve Bank of India in an article in its monthly bulletin.

As the accompanying chart shows, the total amount of funding sanctioned towards projects in the first half (H1) of FY20 was 47% higher than the year-ago period of FY19.

But Indian banks have become loathe towards project financing. Lenders such as Axis Bank Ltd have completely exited project financing after having been singed by rising bad loans. Ergo, this private investment improvement is led by foreign capital.

During H1 FY20, more than 60% of the projects contracted funding largely through external commercial borrowings (ECBs). Low global interest rates and a general unwillingness of Indian banks to lend seems to be the reason behind this.

The share of banks in sanctions towards projects remained high at 67%. Foreign money provided 33% of the total finance. But incrementally, Indian companies are borrowing offshore to meet their capital needs.

Another data point that is evidence towards this is the amount raised through ECBs. In calendar year 2019, ECB inflows totalled $50 billion, nearly double from the previous year.

(Graphic: Santosh Sharma/Mint)
(Graphic: Santosh Sharma/Mint)

This is a sign that the domestic funding pipe, which broke after the debacle at Infrastructure Leasing and Financial Services Ltd, is yet to be completely fixed. Surely, when the country’s largest lender, State Bank of India, reported no growth in corporate loan offtake for the December quarter, it points to one thing. Lenders are still preoccupied with fixing legacy bad loans. Private sector lenders that have fared well, too have kept away from big sanctions.

The fact that private investment is slowly coming up augurs well for the government’s ambitious target of making India a $5 trillion economy. But even more crucial is how the funding needs are met. For now, foreign money seems to have neatly stepped into the banks’ shoes of project funding.

Dollars are fickle and despite the comfort that even the more serious foreign direct investment is on the rise, depending on dollars for large-scale investment would be tough. “Funding has to be a combination of banks and capital markets. It cannot be shouldered by just a few handful of investors," said a senior banker requesting anonymity.

For India’s private investment engine to restart and rev up, projects need all the funding they can garner. Foreign capital may not be enough on a sustainable basis for this.

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