India Incorporated depends more on foreign banks

Bond markets sputter and rupee funding dries up in tumultuous year

MUMBAI: India’s companies are growing more dependent on banks to raise offshore funds going into 2019 as the bond markets sputter and local-currency funding from domestic banks dries up.

Borrowers that are facing challenges in the credit market are finding solace in dollar-denominated loans, even as non-performing debt at local banks, volatility in the rupee and uncertainty over national elections next year add to pressure on financing costs.

The downfall of shadow lender IL&FS group has fueled concerns about default risks, making banks cautious and pushing up the cost some firms pay for loans at home. Companies are increasingly turning to overseas lenders, as distressed assets of about US$210bil at India’s banks limit their capacity to lend rupee funds.

“Many issuers are looking at offshore loans due to low liquidity in the rupee debt markets,” said Durgesh Tinaikar, head of corpo- rate and institutional banking at Mizuho Bank India. “Borrowers find offshore loans easier to raise funds, even though pricing is largely on an upward trend, mainly for banks and non-banking finance companies, due to political uncertainty and risks for volatility in the rupee.”

The big picture is that loan costs are heading up for some borrowers, but had fallen so much earlier that they are still lower this year on average. Average margins on Indian fiveyear foreign-currency loans are 130 basis points more than London interbank offered rate in 2018, the lowest since 2005, according to Bloomberg-compiled data.

In comparison, spreads over Treasuries for dollar bonds of local issuers have risen 109 basis points this year to 275, according to ICE BofAML index data.

Some Indian companies are stomaching the recent uptick in loan rates. State Bank of India, the nation’s biggest lender, is paying a margin of 115 basis points over Libor for its new US$500mil five-year loan, 10 basis points higher than its similar-tenor facility in 2017. Indian Oil Corp is offering 100 basis point margin on a US$1.3bil five-year loan, compared with 70 basis points on the refiner’s US$300mil loan with the same tenor from a year ago.

“Some of the non-bank financial institutions and smaller banks in India have had some credit risk problems,” said John Corrin, global head of loan syndications at Australia and New Zealand Banking Group in Hong Kong.

“Some of the companies are strong and will continue to have access to the foreign market, while others are less so and definitely will struggle to raise funds or will have to pay significantly more.”

In the bond market, credit rating downgrades have weighed on sentiment toward some borrowers. — Bloomberg