NBFCs Eye Offshore Loans as Domestic Borrowing Costs Climb
The Indian financial landscape is witnessing a significant shift as companies increasingly turn to international markets for fundraising. This trend, highlighted by the Reserve Bank of India (RBI) in its recent monthly bulletin, is driven by a confluence of factors including heightened interest from global investors, improving liquidity conditions, and lower hedging costs. The move reflects a broader transformation in the domestic credit environment, influencing corporate strategies and reshaping the way Indian firms approach capital acquisition.
This pivot towards external borrowing is occurring against a backdrop of declining Foreign Direct Investment (FDI) in India. Foreign direct investment into India decreased sharply, dropping by over 40% between 2022 and 2023. This decline resulted in India slipping seven positions to 15th place in the World Investment Ranking, marking a challenging period for foreign investment in the nation.
To address the growing demand for corporate funding, Indian banks are taking proactive measures. Plans are underway to raise approximately Rs 40,000 crore in equity funds during the second half of the current fiscal year. These funds, which include qualified institutional placements, serve a dual purpose: strengthening balance sheets and supporting ongoing capital expansion initiatives. This move demonstrates the banking sector’s commitment to maintaining robust financial foundations while facilitating economic growth.
The diversification of funding sources has become a key strategy for both banks and non-banking financial companies (NBFCs). These institutions are increasingly issuing bonds in foreign markets, exploring new avenues for capital acquisition. The offshore syndicated loan market has emerged as a particularly attractive option for corporates, especially given the anticipation of a potential rate-cut cycle. This market has witnessed significant activity, with substantial issuances from both established borrowers and new entrants, underscoring its growing appeal in the Indian financial sector.
On the domestic front, banks have been actively raising funds through various instruments, including certificates of deposit, high-value savings accounts, and fixed deposits. However, the RBI has noted a potential challenge: the relatively low proportion of low-cost current and savings deposits in total deposits may limit banks’ ability to raise funds through higher-cost options. This situation could potentially squeeze net margins and necessitate a closer alignment between loan growth and deposit growth, leading to a recalibration of incremental credit-deposit ratios.
The shift towards international borrowing is particularly pronounced among NBFCs. These institutions are increasingly looking overseas for funds, driven by the high costs of domestic borrowing resulting from tight liquidity conditions and rising interest rates. In recent months, several major Indian NBFCs have successfully accessed international funding sources through various financial instruments. This strategic move is not only about cost considerations but also aligns with regulatory guidance on diversifying funding profiles, despite the slightly higher costs associated with overseas borrowing.
The RBI’s decision to increase risk weights for bank lending to NBFCs has been a significant factor in this trend. This regulatory change has led to a notable rise in domestic borrowing costs, prompting non-bank lenders to explore external commercial borrowings (ECBs) as a viable alternative. Furthermore, the domestic bond market has become increasingly crowded due to strong credit demand and high fund requirements, making offshore funding an attractive option for many NBFCs.
Industry experts emphasize that securing capital for continued operations and growth remains the top priority for financial institutions, even if it means accepting somewhat higher costs. The preference for offshore funding is partly driven by competitive pricing from global banks for hedging costs, as competition in this space intensifies. This trend is likely to persist, with many firms planning to continue or increase their overseas borrowing activities soon, aiming to diversify their funding mix and capitalize on global opportunities.
While credit and loan growth reached impressive levels of around 18% in FY24, projections suggest a moderation to 13-15% in FY25. Despite this expected slowdown, NBFCs remain focused on maintaining a steady capital pipeline. This approach is aimed at ensuring their ability to navigate both favourable economic conditions and potential challenges that may arise.
As Indian companies become more integrated with international financial systems, they are better positioned to leverage global opportunities. This internationalization of fundraising not only provides access to a wider pool of capital but also exposes Indian firms to global best practices in corporate finance and governance.
However, this shift also brings new challenges. Indian companies venturing into international markets must navigate complex regulatory environments, manage currency risks, and adapt to different investor expectations. The success of this strategy will depend on the ability of Indian firms to build credibility in global markets and demonstrate sound financial management.
As the Indian economy continues to grow and evolve, the financial sector’s ability to adapt and innovate in fundraising will play a crucial role in supporting this growth. The current trend of looking beyond domestic borders for capital represents a significant step in this direction, potentially reshaping the future of corporate finance in India.
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