7/28/2019 ECBs

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KRISHNA KANT & ABHIJIT LELE

Mumbai, 26 June

From being a cheap and ready sourceof capital, external commercial bor-rowing (ECB) is turning out to be adouble whammy for India Inc.

While the rupees depreciation haspushed up the principal repaymentcost in rupee terms, repayment ofmaturing ECB is likely to keep thecurrency on the downward path.

This, experts say, could start adownward spiral unless outflows onaccount of repayment are matchedby fresh capital inflows. Beginning2004, the central bank has approvednearly $220 billion worth of ECB andforeign currency convertible bonds(FCCB), at the rate of a little over $2 bna month. Nearly two-thirds of thisamount was approved in the past fiveyears.

Much of this ECB will come up forrepayment this financial year, put-ting further pressure on the rupee.The rupee held up its value thanks tocopious inflow of capital in the pastfew quarters.

If this money flows out due tomonetary tightening in the US, therupee-dollar exchange rate wouldsoon reflect Indias trading balance,which is not in very good shape, says

Raju Bhinge, chief executive, TataStrategic Management Group. Sincethe beginning of 2012, foreign insti-tutional investors (FIIs) have investednearly $35 bn in the Indian equitymarket.

The equation has been worsenedby a sharp rise in the import intensi-ty of India Inc in recent years. In FY12,the top 559 listed companies exclud-

ing oil & gas and banks importedgoods and services worth $83 bn atthe current exchange rate, an eight-fold jump over 10 years. In compari-son, their forex earnings were only$57 bn in 2012-13, five times higherthan the corresponding figure inFY03. Experts say it will be tough formany companies to service foreigndebt on their balance sheet.

Exports earnings provide a natu-ral hedge against foreign currencyexposure and make it easier for com-panies to service their foreign cur-rency debt. In the current situation, itwould be tough for companies to

service their forex liability unlessfresh capital inflows come to the res-cue, says Revati Kasture, head ofresearch at CARE Ratings.

According to Reserve Bank data,the median repayment period for ECBhas been around 69 months in thepast six years.

So, ECB raised during the boomyears of FY07 and FY08 would be due

for repayment from this financial year.RBI approved nearly $55 bn worth ofECB in those two years, a quarter of allapprovals granted so far.

Its recent depreciation will alsopush up the repayment cost inrupees, putting additional burdenon India Incs stressed balance sheet.On average, the principal repaymentcost is expected to rise by 25-30 percent for a majority of the companies.

Nearly 85 per cent of theseapprovals were granted when therupee was trading below 48 to a dollarand half came when it was in therange of 40-45. The blow will soften a

bit for companies which have hedgedtheir entire forex exposure but fullhedging is costly.

Money through ECB in, say, 2007and 2008 (when the rupee was 40-45 toa dollar) will see the principal paymentscommencing in 2013. Those compa-nies with unhedged positions wouldend up buying dollars at prevailing rate.This might push many into loss terri-

tory, says a public sector banker.The principal payments in many

cases are back-ended. For a five-yearECB, typically this might be spreadover the third to fifth year. In thecurrent circumstances (weak rupee),the payment bill will grow substan-tially. Banks worried about adverseeffects would prefer to take suchcases for debt recast to avoid red inkon the balance sheet, an officialsaid.

The sharp fall in the rupee meanssome importers availing tradefinance will face hard days ahead.N S Venkatesh, chief general man-ager and treasury head, IDBI Bank,said the rupees fall from 54 to adollar to 60 has been very fast.Those using trade finance (forimports) in foreign exchange with-out currency hedges will be hithard. It is difficult to estimate theextent of impact. This being short-term finance, they might end uppaying more to buy dollars forrepayment. There is a tendency tokeep positions open. Now, they arecaught on the wrong foot. Theeffect might not be visible in theimmediate future but weigh ontheir balance sheets in the next fewquarters, he added.

Others say many companies will

be forced to roll over their ECB. Idont expect too much repaymentin the current economic environ-ment. Most companies would rollover their forex debt, either by rais-ing fresh foreign debt or renegotiat-ing the repayment terms with theirlenders, says Kishore Narne, asso-ciate director & head, commodity &currency, at Motilal Oswal.

ECBs: From easy money to double whammy

Rupee depreciation and a slowdown in capital inflows make it harder for business to serviceliability, while keeping pressure on the currency

* Average for the financial year, number of dollars for every ~100; ECB: External commercial borrowing; FCCB: Foreigncurrency convertible bonds: Compiled by BS Research Bureau Source: RBI, Bloomberg

INDIA INCS TRUSTED TOOLYear-wise approvals for ECBs & FCCBs byRBI