The development also points to a larger problem where foreign lenders avoid more Indian sectors and resort to selective lending in areas that face policy uncertainty and are generally considered risky for investments.
Shipping companies need cheaper overseas loans, as they cannot compete with foreign shippers by raising high-cost funds locally. External commercial borrowings (ECBs) are much cheaper compared to domestic loans by as much as 300 basis points as interest rates in developed markets stay near zero, while commercial credit in India is available at double-digit rates.
However, the shipping firms now have to do with high interest bearing loans from Indian finacial institutions. Essar Shipping MD AR Ramakrishnan told FE that the shipping sector has been unable to source ECBs in the past couple of years with lenders, especially European banks, turning risk averse.
This is spelling trouble for shipping companies, which are already hit by downturn in freight rates.
Banks are cutting down exposure on shipping portfolio. They have turned very cautious of lending against shipping assets. They are looking at actual contracts behind the assets, he said.
This is partly happening due to the absence of a clear maritime policy, he added. Shipping industry executives said the government needs to clearly spell out the maritime policy as well as the cargo support policy to boost investments in the sector. Most companies look for dollar funding especially for their capex needs, as rupee funding is costly. Companies are also scouting for foreign loans to replace costly domestic debt.
The finance ministry, over the past couple of months, relaxed ECB norms to encourage refinancing of domestic credit. Shipping sector is depressed across the globe due to overcapacity and depressed freight rates. With overseas banks are battling challenges in their home economies, they are pruning their exposure to risky markets like India. The threat of a sovereign ratings downgrade is only adding to foreign lenders' risk aversion, said a foreign banker specialising in ECBs & trade financing.
Indian ships share in the country's overseas trade has declined to less than 8% now from 14% during 2005-09, as foreign ships accounted for majority of the trade. Baltic Dry Index, a measure of costs to ship dry-bulk commodities such as coal and iron ore, has fallen nearly by 50% this year-- posting its worst July-September quarter in 14 years.