Offshore financing raised by Indian companies through the External Commercial Borrowing (ECB) route saw a sharp rise in FY24 (till February) with ECB registrations increasing by 82 percent in value terms to $41.5 billion as India Inc steps up its capex spending.
ECB registrations stood at $22.8 billion during the same period of FY23, according to data from the Reserve Bank of India.
This marks a turnaround for offshore finance demand from Indian companies, with net inflows of $3.7 billion during April-February 2023-24, as against net outflows of $4.7 billion a year ago, RBI data shows.
Funds raised through the ECB route can be used for a variety of purposes, including capex, on-lending, acquisition of assets, and repayment of existing loans.
Capex spends increasing
The rise in offshore loan demand is being fuelled by India Inc’s growing capex needs.
In its March bulletin, the RBI noted that of the total ECBs registered between April 2023 and January 2024, more than three-fourths of the agreements were earmarked for capital expenditure purposes (including on-lending and sublending for capex).
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According to Dr Sunil Kumar Sinha, Principal Economist at credit rating firm IndiaRatings, a large part of the financing raised for capex by Indian companies is for greenfield projects.
“This clearly indicates that after a lull of a decade, finally there are green shoots in terms of the corporate sector (being) willing to take greenfield capex,” he said.
Sinha added that companies are realising that geopolitical headwinds in recent times have not made much of a dent on growth prospects and hence they are no longer interested in sitting on the fence on investment decisions.
“Against all expectations, the US economy has done well. All the geopolitical upheaval is not making too much of a dent on growth prospects. All these risks are getting factored in the decision making process. Corporates are realising that growth is going to go up from here and if they don't make the required investments then they will miss the bus,” he said.
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According to Sinha, sectors such as renewable energy continue to see capex, while cement and steel are sectors where greenfield capex is picking up.
“The kind of capex the government is undertaking is leading to strong demand for steel, cement and such products. Some of the PLI (production linked incentive) related sectors are attracting a fair amount of investments and the digital economy is doing well with greenfield investments in data centres,” said Sinha.
“Chemicals, textiles etc may not see traction right now but things have started moving there too,” he added.
Rate Cuts
Experts added that the rising interest of Indian corporates in offshore loans is also being driven by expectations of rate cuts and favourable market conditions.
“The increase in (ECB) registration is also supported by expectations of a decline in the benchmark rate during the second half of the fiscal year along with favourable movement in hedging costs and the need to expand sources of funds, especially for lending institutions,” said Aniket Dani, Director- Research, CRISIL Market Intelligence and Analytics.
Dani added that external borrowings in fiscal year 2024 were dominated by large corporate groups, with the primary purpose being expansion and refinance.
“External commercial borrowings increased 1.8 times to USD 38.8 million between April 2023 and January 2024 (10MFY24) with ~26 percent of funds being used for on-lending or sub-lending (40 percent growth over 10MFY23) followed by funds raised for modernisation (two times growth over 10MFY23) having a 17 percent share of total issuances. Further, the refinancing of ECBs also witnessed growth of 92 percent in the 10MFY24 period,” he added.
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