External commercial borrowings (ECB) of Indian companies have increased by 50% in the six months ended 30 September from a year ago. This is all because of the cheaper overseas funds, easier overseas borrowing norms and weakened local banks.
In the first 2 quarters of FY20, the corporates borrowed $24.3 billion from overseas markets as per the data from the Reserve Bank of India (RBI) compiled by Bloomberg. This was $16.46 billion and $9.68 billion in the first two quarters of FY19 and FY18, respectively.
Even after this jump of the commercial borrowings, still Banks are the single largest for funds of businesses. In the financial year 2019, commercial borrowings are just 12% of such businesses.
However, bank credit growth has suffered year, with outstanding non-food credit growing 8.8% year-on-year (y-o-y) to ₹97.68 trillion in the fortnight ended 25 October.
As per a report by CARE Ratings,It is required to check whether the bank credit would pick up in the FY20 when the economic activity is high. This is to check the extent of substitution if required.
“The constrained and relatively high-cost lending of domestic banks and financial institutions on account of stressed asset quality, heightened risk aversion and strained liquidity conditions has, in part, been counterbalanced by the low interest rate regime in the international markets,” said Kavita Chacko, senior economist, CARE Ratings.
“The primary reason for corporates to seek funding from ECB is the better pricing they are getting. With the currency becoming slightly strong and the hedging costs becoming cheaper, the all-inclusive cost is still lower than raising money in India,” said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial.