External Commercial Borrowings More Than Double To $50 Billion In Two Years
U.S. one-hundred dollar currency banknotes. (Photographer: Akos Stiller/Bloomberg)

External Commercial Borrowings More Than Double To $50 Billion In Two Years

Foreign debt more than doubled in two years as domestic lenders turned cautious after a liquidity crisis and India’s central bank eased rules for using overseas borrowings.

Total external commercial borrowings—loans given by non-resident entities to eligible Indian borrowers in foreign currency—through both the approval and automatic route, increased 61.45 percent year-on-year to $50.15 billion as of December 2019, according to the Reserve Bank of India’s data. That’s a 117 percent jump from 2017.

To be sure, the RBI releases data on ECBs based on approvals taken by companies. The final amount raised may differ marginally.

Indian corporates turned to foreign lenders for loans as bond investors and traditional lenders became risk-averse after the collapse of the IL&FS Group in September 2018. That made it difficult for non-bank lenders to raise funds as borrowing costs increased. Hence, they lent less to conserve capital, reducing their leverage.

Regulatory changes were another factor that drove ECBs. The RBI regulates such borrowings by defining parameters such as the minimum period of maturity, permitted and non-permitted end-uses as well as imposes a maximum ceiling on the interest rates that the funds can be raised at.

In January 2019, the RBI expanded the pool of eligible borrowers and lenders, allowing more corporations and lenders to participate. In April, the central bank’s large exposure framework came into effect that persuaded firms with more than Rs 10,000 crore in bank borrowings to turn to debt market or foreign lenders for credit. These companies could also continue raising loans from domestic banks but at a higher cost, as banks would need to increase their provisions and a risk-weights for these set of borrowers. Besides, the RBI tightened rules for working capital availed from local banks.

Again, in July, the RBI eased rules around the end-use of funds raised through ECBs. That allowed domestic firms to deploy their loans from foreign banks and other lenders for a wider range of activities and purposes.

Funding through ECBs had peaked at $12.2 billion in March. U.K.-based steelmaker ArcelorMittal alone raised around $5 billion during the month, the RBI data showed. The total ECB funding averaged at more than $3 billion each month between April and December 2019.

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