Borrowers availed abroad in various sectors Loan Value of $3.7 billion during April-June’22, down 20 percent from $4.6 billion in the same period a year ago.” Affected appetite for FY22, apart from a stressed currency adding to costs” Radhika Rao, DBS, Chief India Economist at DBS.
The first quarter of the current year turned out to be an extremely volatile period in recent times, with both the onshore interest rate regime and the rupee proving to be major hurdles for the ECB. “Another challenge is, ECBs are tied to floating rates of 6-month or 1-year rates, and these short-term rates have moved higher than the longer-term” Soumyajit Niyogi, India Ratings
With tight global liquidity conditions, volatile currency markets as well as uncertainty due to the Russo-Ukraine war, borrowers are seeing comfort in domestic markets. Deputy Managing Director, Rajiv Anand said, “As interest rates continue to rise both locally and globally, corporates will assess what will best benefit them.” “Given the fact that a lot of arbitrage is going down, the demand for bank credit will increase.”
This is also reflected in the latest bank credit numbers. April-July credit growth stood at 4 per cent, compared to a contraction of 0.4 per cent in the same period a year ago. “Meanwhile, domestic bank credit growth accelerated in the June quarter, with credit to industry growing at 8.7%, with agriculture and services sectors also registering significant growth,” Rao said.
Apart from market factors Rupee and liquidity position, are some of the structural factors contributing to the slowdown in external borrowing. Lenders in the West have become very sensitive to ESG factors, especially the environment, which is a challenge even for sectors highly relevant to environmental concerns such as conventional energy. “I believe rates and currency are more cyclical factors, while the ESG is structural,” Niyogi said. “Large borrowers are gearing up for global ESG compliance, while many medium-sized borrowers will fall back on domestic sources”.
Going forward, the easing of ECB norms by the Reserve Bank after the rupee touched a new low in July could revive interest in foreign loans. “As part of the steps to enhance capital inflows, the ECB borrowing limit under the automatic route was raised in July, which could have helped attract interest in 2QFY”, Rao said.