He explained that NBFCs have anyway been looking to expand their sources of funding for a few years now and the higher ECB fund-raising ties in with that.
In the first six months of FY20, companies raised over Rs 1.4 lakh crore through external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs), according to a recent report by State Bank of India (SBI). The large exposures framework (LEF) of the Reserve Bank of India (RBI), which came into force on April 1, and heightened risk aversion among banks resulted in a 25% year-on-year (y-o-y) rise in foreign borrowings by Indian companies. Non-banking financial companies (NBFCs) accounted for a chunky 45% of all ECB issuances in April-September 2019. On a y-o-y basis, NBFC fund-raising through the ECB route shot up 80% during the period.
The LEF mandates that the sum of all exposures of a bank to a single borrower must be no higher than 20% of the bank’s available eligible capital base at all times. In exceptional cases, a bank’s board may allow an additional 5% exposure. Further, the sum of all the exposure values of a bank to a group of connected counter-parties must be restricted to 25% of the bank’s available eligible capital base at all times.
Even public-sector enterprises (PSEs) had to seek foreign funding because of the LEF. During the period under review, Power Finance Corporation (PFC) raised $13 billion and REC raised $100 million through the approval route. In its report, SBI wrote that recent stake sales of the government as part of its disinvestment programme has resulted in some PSEs become part of connected counterparties. “…hence there might be little headroom for bank lending to the singular CPSUs,” the bank said, adding, “In fact, even if such lending were to happen it would result in additional bank capital or higher risk weights resulting in elevated rates. No wonder some of these entities are tapping the ECB route more vigorously given such constraints.”
Among the other major issuers were Piramal Capital and Housing Finance, Shriram Transport Finance and India Infoline Finance, who raised $750 million each. L&T Finance raised $650 million, ECL Finance raised $500 million and Indiabulls Housing Finance $400 million. Indian Railway Finance Corporation (IRFC) ($300 million), Housing Development and Finance Corporation (HDFC) ($200 million), PNB Housing Finance ($150 million) and Aditya Birla Finance ($140 million) also raised overseas debt in H1FY20.
Sheer inability to access the domestic bond market rather than cost considerations may have pushed NBFCs abroad. Prakash Agarwal, director and head — financial institutions, India Ratings and Research, said, “More than pricing, it was the inability to raise capital in the domestic market that has pushed NBFCs abroad. Since there were many of them, the quantum of paper in the market could have dampened sentiment.”
He explained that NBFCs have anyway been looking to expand their sources of funding for a few years now and the higher ECB fund-raising ties in with that. Also, in terms of pricing, post-hedging costs for them have turned out to be better than at home.
Analysts say the issuances may have found good traction with foreign investors as they are looking for higher yields. “The policy easing of external commercial borrowing and the lower interest rate regime in the overseas markets has been increasing the appeal of overseas funding for corporates,” CARE Ratings said in a recent report.