ECONOMIC NOTES

EPW Research Foundation

Bank and External Borrowings of the Corporate Sector

Bipin K Deokar, Ramesh Jangili

Large Indian corporate rms went on a borrowing spree abroad a few years ago attracted by the lower interests that came on external commercial loans. But sluggish protability and currency depreciation are making it difcult for the rms to meet repayment obligations. In domestic borrowings, the corporate stress has led to higher non-performing assets of banks but there has been no sign of systemic risk to the banking sector.

1 Introduction ndias corporate sectors debt has become a cause for concern as the mounting debts of major companies are now at an unsustainable level. In recent years some of the companies have been entangled in a debt trap as their debt payment requirements have grown at a higher pace compared to their sales and prots leading to their inability to service debt. In the last two years industrial growth has been nearly stagnant due to multiple factors, the more important being the investment cycle downturn, slowing private consumption growth, supply-side bottlenecks and weak external demand. The analysis of corporate nancials suggests that stress levels are high, as the margins of the corporate sector have come under pressure and their aggregate debt levels have increased. The mounting debt of the corporate sector has translated into twin crises, (a) the corporate performance has weakened as the stress levels continued to be high, and (b) the banking sector has come under stress as it has witnessed a sharp rise in stressed assets (bad loans and restructured loans). This note attempts to review the borrowings of the corporate sector in recent years, with a particular focus on overseas borrowings and the spillover effect on the banking sector. In order to review the trend and composition of the corporate borrowings the aggregate debt of Indias large-cap 100 companies listed on National Stock Exchange (NSE) by market value known as the CNX 1001 has been evaluated. 2 Corporate borrowings

debt increase in 2012-13 has outpaced capital expenditure. The steep growth in borrowings has stretched the nancials of major companies leading to a decline in net prots. Although the growth in total borrowings of the 100 companies has decelerated from 20.9% in 2010-11 to 18.4% in 2012-13 the average growth of the total borrowings during the last three years has been 19.6%. The leverage ratio of the 100 companies, as measured by the total borrowings to equity ratio has increased during the review period (Table 1).
Table 1: Major Performance Indicators of the CNX 100 Companies
Year 2010-11 2011-12 2012-13

y-o-y growth (in %) Net sales Expenditure Profit after tax Total assets Total borrowings 1) Bank borrowings 2) Overseas borrowings 3) Other borrowings Ratios Borrowings to total assets Leverage ratio

21.5 20.9 14.1 19.8 20.9 11.4 41.2 15.8 18.7 78.2

23.6 25.7 9.4 14.7 19.5 -5.3 24.8 28.4 19.5 85.7

10.7 12.7 13 14.3 18.4 5.5 22.2 20.9 20.2 91.8

Source: Compiled using Prowess database of CMIE.

Bipin K Deokar is with the EPW Research Foundation and Ramesh Jangili is with the Reserve Bank of India. The views expressed by the authors are personal.
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In recent years, the borrowings of the corporate sector have been increasing signicantly, particularly overseas borrowings. For some of the companies the
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Reecting the general slowdown in the macroeconomy, rising ination, monetary tightening, and growing input and wage costs, the performance of the corporate sector in 2012-13 has witnessed moderation in overall activity in the manufacturing and services sectors. As a result the aggregate net sales of the sample companies have decelerated signicantly to 10.7% in 2012-13 from 23.6% in 2011-12. The CNX 100 companies turnover, operating prot and net prot have all grown at a slower pace than their debt over the last two years. In 2012-13, the borrowings of the CNX 100 companies increased substantially in comparison to net sales. As a result, the borrowings to total assets ratio increased to 20.2% in 2012-13 from 18.7% in 2010-11. In 201213 the operating prot to debt ratio also fell, which could have had an adverse impact on the ability of companies to service debt with the prot generated from operations.
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continued from March 2010 to October 2011, 35 Overseas borrowing when it raised the repo Bank borrowings 30 rate 13 times from 4.75% to 8.50% to contain in25 ation that was hover20 ing near double-digits. After the RBI began to 15 raise the policy rate in 10 March 2010, there have 2009 2010 2011 2012 2013 been persistent increases in deposit and lending rates of schedThe total borrowings of the CNX 100 companies comprise bank, overseas and uled commercial banks (SCBs) (Shetty other borrowings. During the review 2013). As a result, the cost of bank period of 2010-11 to 2012-13, the share of borrowings was substantially higher in overseas borrowing has outpaced that of comparison to overseas borrowings as bank borrowings. The biggest advantage the lending rates of the domestic banks of tapping the overseas market is the rose. During the tightening phase, lower interest rate. Graph 1 indicates bank credit to the corporate sector that bank borrowings have been substi- decelerated considerably as companies tuted by overseas borrowings on account switched to overseas borrowings via of a widening of interest rates payable external commercial borrowings (ECBs) on borrowings from the domestic over and foreign currency convertible bonds external markets, with the latter being (FCCBs). low-cost. The average growth of the bank borrowings for the review period 3 External Commercial was the lowest (around 4%) whereas the Borrowings overseas borrowings growth was the highest (around 29%). The Reserve Bank of Indias (RBI) phase of tightening monetary policy In the last two to three years ECBs have emerged as a major source of funds for the corporate sector. Interest rate arbitrage has been the biggest incentive

Graph 1: Percentage Share Bank and Overseas Borrowings to Total to Total Graph 1: Percentage Share of of Bank and Overseas Borrowings Borrowings(End-March) Borrowings (End-March)

for companies. For instance, companies can raise funds in the international market at 300 basis points above the London Interbank Offered Rate (Libor), enabling rms to borrow loans at just about 4-5% per annum, while the cost of borrowing for a similar tenor in the domestic market will be around 10%12% (Kumar 2012). ECBs by corporates are allowed through the automatic and approval routes. On a
Table 2: Month-wise Amount Raised through ECBs/FCCBs (in $ million)
Month 2010-11 2011-12 2012-13 2013-14

Percentage

April May June July August September October November December January February March

2,818 696 1,791 1,165 1,089 3,091 800 1,129 3,416 2,709 1,441 5,631

2,065 2,653 3,335 4,169 3,708 2,362 2,475 1,588 4,469 2,702 2,604 3,837

2,732 3,370 1,997 1,070 2,369 2,776 4,299 1,347 1,146 3,514 2,343 5,082

1,125 2,487 1,953 3,706 2,305 3,346

Cumulative April-September 10,650 18,292 14,314 14,922 October-March Annual 15,125 17,674 17,731 25,776 35,967 32,045

Source: Compiled using RBIs monthly data on ECBs and FCCBs.

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EPW Research Foundation Graph 2: ECBs Debt Outstanding (End-March)

1,40,000 1,20,000 1,00,000 80,000 60,000 40,000 20,000 0 2007 2008 2009 2010 2011
24.0 27.8

ECONOMIC NOTES

as % to total external debt

27.8 27.1

28.9

ECBs Outstanding

cumulative basis, the borrowings of the corporate sector via ECBs have increased signicantly from $25,776 million in 2010-11 to $35,967 million in 2011-12. While the monthly data on ECBs released by the RBI reveals that compared with a total of $14,314 million borrowed in the rst half of 2012-13 cumulative borrowings have touched $14,922 million in H1:2013-14 (Table 2, p 134). Since 2010 there has been sizeable rise in ECBs and, as a result, the ECB debt outstanding has also increased drastically, shooting up to $1,20,893 million in 2012-13 from $70,726 million in 2009-10 (Table 3).
Table 3: External Commercial Borrowings ($ million)
End-March 1 Approvals# 2 Gross Disbursement* 3

steep exchange rate depreciation. The borrow30.3 31.0 30 ing companies have to 25 cope with substantial 20 exchange rate risks as 15 the debt service com10 mitments in rupee terms 5 can increase if there is 0 depreciation of the do2012 2013 mestic currency. Amid heightened volatility in global and Indian currency markets, the Indian rupee depreciated by 17.7% against the dollar during mid-May to end-August 2013. However, the rupee reversed this trend in September 2013 and appreciated by 6% (RBI 2013b). Overall in the rst four months of 2013-14, the rupee depreciated by around 11%. With the depreciation of the rupee, overseas borrowings have turned costly, translating into a higher interest outgo. Generally companies hedge their currency exposure up to one year as the overseas borrowings are exposed to currency uctuations. But despite hedging, the companies have
35 Interest* 5 Total Servicing 6=(4+5) ECB Debt Outstanding 7

Table 4: Indias External Debt Service Payments ($ million)

Year 2009-10 2010-11 2011-12 2012-13

ECBs Repayment Interest

14,472 13,959 11,498 10,451 3,244 3,508

25,198 19,782 5,416

23,224 16,914 6,310

Source: RBI, Bulletin, September 2013.

Amortisation* 4

2008-09 2009-10 2010-11R 2011-12PR 2012-13P

15,702 20,636 25,218 35,354 32,022

13,226 14,029 22,283 28,922 25,497

6,578 11,498 10,451 19,782 16,915

3,965 3,244 3,508 5,416 6,310

10,543 14,742 13,959 25,198 23,225

62,461 70,726 88,479 1,04,786 1,20,893

R: Revised. PR: Partially Revised and P: Provisional. # - Based on date of agreement of the loan which may differ from the date of granting the loan registration number by the RBI. Ceiling on ECB approvals is fixed on the basis of the latter, which may either be after or before the date of agreement of the loan. Hence, there may be some difference between the amount shown under approvals in the table and the amount of ceiling fixed for a particular year. * - Based on the balance of payment data. Source: RBI Bulletin, September 2013.

among corporates have together also increased the stress on asset quality of banks. The present level of restructured debt is alarming and is expected to rise if companies get even more stressed. Increasing stress in the corporate sector was reected in the sharp increase in the amount of debt restructured under the corporate debt restructuring mechanism. The slowdown in the economy coupled with a sharp rise in NPA s in the last few years pressed banks to actively resort to restructuring (Pandey, Tilak and Deokar 2013). As a result, restructured advances as a percentage of gross advances of SCBs were around 1.2% in 2008, which went up to 5.8% in 2013. The asset quality of the banking system deteriorated signicantly during the year, the gross NPA ratio at the aggregate level increasing to 3.6% at end-March 2013 up from 3.1% at endMarch 2012. However, the rising NPAs and restructuring of loans are not a systemic issue. Although the average leverage ratio for the corporate sector remains comfortable, stress is building up in some sectors. If a revival of these sectors does not quickly take place, it can have a domino effect on the asset quality of banks.
Note
1 The CNX 100 index predominantly has a large-cap tilt to its holdings, accounting for about 82.8% of the free oat market capitalisation of the stocks listed on NSE as on 30 September 2013.

Amongst all the major components of external debt, the share of ECBs has continued to be the highest at 31% (Graph 2) of the countrys total external debt at the end of March 2013 followed by short-term debt (24.8%), as per the RBIs study, Indias External Debt (Table 4). The servicing of ECBs during 2012-13 accounted for 74.2% of the total debt service as against 80% during 2011-12, reecting lower principal repayment of ECBs (RBI 2013a). 4 Issues An additional factor that can increase the vulnerability of the corporate sector is the pressure of debt ser vicing following
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to bear a higher cost for rolling over hedged positions. Another risk is the rise of interest rates in the international markets. At present, the interest rates in the international market are low on account of ample liquidity pumped in response to the crisis. In case interest rates rise in the international market, the cost of overseas borrowing will increase, making the rollover costlier. 4.1 Implications During 2012-13 the non-performing assets (NPA) ratio of all major sectors have weakened. Besides, credit concentration in certain sectors and higher leverage
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References
Kumar, Rajesh (2012): De-jargoned: External Commercial borrowing, Mint, 19 December. Pandey, S, V Tilak and Bipin K Deokar (2013): Non-Performing Assets of Indian Banks: Phases and Dimensions, Economic & Political Weekly, June 15, Volume XLVIII No 24. RBI (2013a): Bulletin, September. (2013b): Macroeconomic and Monetary Developments Second Quarter Review 2013-14. (2013): Report on Trend and Progress of Banking in India 2012-13. (2013): Annual Report 2012-13. Shetty, S L (2013): Rajans Monetary Policy Foray: Pursuit of Low Ination, Economic & Political Weekly, 26 October, Volume XLVIII, No 43.

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