India Inc stays averse to bank loans

In a strange twist to the economy, an industrial rebound is looking strong, but banks are still flush with money because India Inc has found a great deal of funds from private equity placements and overseas borrowings.

Indian companies are increasingly looking for funds to fuel their expansion from sources other than bank loans. In a strange twist to the economy, an industrial rebound is looking strong, but banks are still flush with money because India Inc has found a great deal of funds from private equity placements and overseas borrowings.

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More than two-thirds of companies’ fund requirements in the April-September period this year for Indian companies came from non-banking sources. Official data showed there has been a sharp drop in bank credit to the commercial sector in the first half of the current financial year.

Firms have preferred non-conventional sources such as qualified institutional placements (QIPs) of shares sold at a mutally agreed price, borrowings from overseas banks that come at a significantly cheaper costs and bonds issued by companies. In 2009, Indian companies have raised about Rs 32,558 crore through the QIP route.

“Though the growth of credit has been significantly low despite recovery in the economy and is becoming a cause for concern, large number of corporate houses have gone in for non-banking sources of revenue,” a senior Finance Ministry ministry official told Hindustan Times.

External commercial borrowings (ECBs) are typically cheaper by nearly three percentage points compared to domestic banks. While loans from overseas banks are available at an interest rate of about 8 per cent, the effective average interest rate charged by domestic banks is more than 11 per cent.

Experts also cite other reasons including cost-cutting and fears of higher interest rates.

“With sentiments remaining low for most part of the year, companies were focussed on cost saving measures,” J.M. Garg, chairman and managing director, Corporation Bank told Hindustan Times.

“Banks also reined in credit to the retail sector due to perceptions of increased risk on account of general slowdown and to guard against bad loans,” the finance ministry said in the mid-year economic review last week.

Appetite for bank credit could remain low over the next few months with signs that the Reserve Bank of India (RBI) would hike interest rates to control inflation.

“With rising inflation becoming a serious concern, the central bank is expected to take some steps,” DK Joshi, chief economist, Crisil said.