Overseas borrowings by Indian cos hit year's low on EU crisis, rupee fall

MUMBAI: Overseas borrowings by Indian companies plunged to a year's low as the European sovereign crisis forced banks to shut doors on Indian firms and corporates opted out of the market after the collapse of the rupee.

The fall in approvals for foreign borrowings also reflects the overall slowdown in investments or proposals for new projects due to lack of clarity on economic policies as decision-making has nearly stalled in the government.

External commercial borrowings, the most favoured route to borrow funds for top corporates till recently due to interest rate advantage, fell to $1.2 billion in November from $4.12 billion in July, data from the Reserve Bank of India shows. There was about 400-600 basis point difference between Indian and London rates. A basis point is 0.01 percentage point.

"Market is challenging with banks becoming selective," said Manmohan Singh, MD & head of debt capital market, Royal Bank of Scotland, the top bond arranger last year. "Cost of funding for banks has gone up, which in turn has pushed up cost of borrowing for corporates."

Companies are shelving borrowing plans as lenders such as BNP Paribas and Societe Generale hold back from lending and improve their capital by selling off assets. Investors fear that the crisis in European sovereign credit could push up rates further as distrust among banks leads them to park funds with the European Central Bank, which are at more than 400 billion.

"European banks that are large financiers are staying away from the market," said Parthasarthy Mukherjee, head of treasury and international banking at Axis Bank, the second-ranked domestic debt arranger. "Overseas borrowing costs have been very volatile. An Indian corporate with AAA rating can access dollar funding at about 6%. This was much lower at 3-4% last year."

Also, companies that used the interest rate arbitrage between the domestic and international markets were bruised by the sudden collapse of the rupee against the US dollar since August. The Indian currency lost 8% in the December quarter alone.

The losses of Nifty 50 companies in the December quarter due to the rupee's fall are estimated between Rs 3,500 crore and Rs 4,000 crore, according to rating company Crisil. These companies nearly had a quarter of the Rs 1.5 lakh crore of debt in foreign currency.

With corporate morale at a low, investors look for signals from the government. "At the moment, the key concern is the dip in underlying capital expenditure," said RBS' Singh. "Corporates are looking for signals on policy issues and on the interest rates front."