Entrepreneurs Curb Expansion Plans as Loans Plunge

Reserve Bank of India Governor Duvvuri Subbarao
Duvvuri Subbarao, governor of the Reserve Bank of India. Photographer: Dhiraj Singh/Bloomberg

Syndicated loan volumes in India slumped to the lowest since the global financial crisis started as the highest borrowing costs among Asia’s major economies made companies curb expansion and banks limit risks.

Lending fell 64 percent to the equivalent of $14.7 billion since June 30 from a year earlier and the least since $11.4 billion in the same period of 2008, according to data compiled by Bloomberg. The average interest margin on U.S. dollar loans for Indian companies is 285 basis points, 28 basis points higher than borrowers in the rest of Asia outside of Japan.

Central bank Governor Duvvuri Subbarao this quarter cut his economic growth estimate to 5.8 percent, the slowest since 2003, and ordered local lenders to set aside record reserves as troubled credits double. Billionaire Gautam Adani’s Adani Power Ltd. deferred 6,500 megawatts of capacity addition, while Sajjan Jindal’s JSW Energy Ltd. delayed expansion of a 3,200 megawatt project in the state of Maharashtra.

“Entrepreneurs have cut back on investing, and hence borrowing, and on top of that merger and acquisition volumes have plunged,” said Birendra Baid, the Asia head of loan syndication at Deutsche Bank AG, the fifth-largest arranger of foreign deals in India this year. “Until the policy environment improves, we’re not going to see a jump in loans.”

Baid spoke in a telephone interview before an Asia Pacific Loan Market Association conference today in Mumbai.

Reliance Loan

Reliance Industries Ltd., which runs the world’s largest refinery complex, is paying a margin of 220 basis points, or 2.2 percentage points, more than the London interbank offered rate on part of $1.5 billion it borrowed for five years in September, according to data compiled by Bloomberg.

By contrast, PTT Exploration & Production Pcl, Thailand’s biggest publicly traded oil and gas explorer, paid a starting margin of 85 basis points to finance the acquisition of Cove Energy Plc. The margin eventually increases to 185 basis points.

Reliance is rated Baa2, the second-lowest investment grade by Moody’s Investors Service and just one rank lower than PTT Exploration, at Baa1.

“Loan pricing in India rose faster than in other markets in Asia partly because some large Indian deals were pushed through at very tight pricing and these deals traded very poorly in the secondary market,” said Deutsche Bank’s Baid.

‘Unpleasant Surprise’

Some 54 loan transactions in all currencies have been signed since June 30, versus 80 in the first half and 248 in all of 2011, data compiled by Bloomberg show. Foreign loans fell 66 percent to $4.9 billion this half versus the same period of 2011 and local-currency lending is down 56 percent to 539 billion rupees ($9.8 billion).

The Reserve Bank of India last month increased the cash buffer that local banks must set aside for restructured debt to 2.75 percent from 2 percent after a report showed 5.37 percent of standard loans were being reworked as of June, up from 4.69 percent in March.

Subbarao cut his growth forecast for the year through March from a previous estimate of 6.5 percent. The central bank’s overnight lending rate, at 8 percent, is the highest of the major economies in Asia.

The new provisions were an “unpleasant surprise,” K.R. Kamath, chairman of Punjab National Bank, said on Oct. 30. State Bank of India, the nation’s largest lender, will have to set aside more than 3 billion rupees to comply, according to Chairman Pratip Chaudhuri.

Tata Communications

Mergers and acquisitions in India this half totaled $8.5 billion, down from $22.7 billion in the first six months of the year, according to data compiled by Bloomberg.

Tata Communications Ltd., controlled by India’s biggest business group, had lined up acquisition financing of as much as $2 billion to help fund a possible bid for Cable & Wireless Worldwide Plc, people familiar with the matter said in March. The Mumbai-based company was “unable to reach agreement with C&W on an offer price” and abandoned its plans, Tata Communications said in a statement issued April 19.

“Indian loan volumes have typically come off the back of cross-border acquisitions, as well as regular capital expansion funding,” said Atul Sodhi, the head of Asia-Pacific loan syndication in Hong Kong at Credit Agricole SA, and chairman of the APLMA. “With the global environment what it is, I can’t imagine many companies in India or anywhere else needing significant funds to expand.”

Government Bonds

Elsewhere in India’s markets, the yield on the benchmark 8.15 percent sovereign bond due in 2022 increased one basis point to 8.20 percent in Mumbai yesterday, according to the central bank’s trading system. Yields rose to a one-week high on speculation a drop in cash in the banking system will reduce demand for debt.

The extra yield investors demand to buy 10-year Indian bonds over U.S. Treasuries was little changed at 657 basis points yesterday. The spread rose to as much as 661 on Nov. 16, the highest in more than two months.

Rupee-denominated notes returned 9.2 percent this year, the second-best performance among the 10 Asian markets monitored by HSBC Holdings Plc. Indonesian bonds offered 11.4 percent and South Korean debt returned 7 percent.

The rupee was little changed at 55.095 against the dollar yesterday, according to data compiled by Bloomberg.

Foreign Banks

Credit risk for government-controlled SBI, considered a proxy for the sovereign by some investors, touched a 15-month low of 239.8 basis points on Nov. 7. The cost of insuring the lender’s debt for five years against non-payment using credit-default swaps has since increased 10 basis points, according to data provider CMA.

The market share for lending by foreign banks in India is also shrinking. Four of the top 10 arrangers of loans year-to-date were international banks, down from five in 2009 and seven in 2007, according to data compiled by Bloomberg.

Syndicated financing in India has declined more sharply than in other markets around Asia, Bloomberg-compiled data show. Hong Kong loans are up 7.57 percent since June 30 compared with the same period of last year while bank borrowing in Singapore is down 32 percent.

“From a very strong ‘momentum’ that prevailed until 2010, sentiment turned negative pretty quickly for India due to the policy and political environment,” Deutsche Bank’s Baid said. “Most Asian banks are able to raise money at substantially lower costs than what the Indian banks have to pay.”

Risk Appetite

Allegations of corruption in the 2008 sale of mobile phone licenses and a federal probe into allocation of coal mining contracts this year have roiled Prime Minister Manmohan Singh’s administration, with a political gridlock stalling legislation. About 102 bills are pending in parliament, according to New Delhi-based PRS Legislative Research, a monitoring group.

The most recent session of parliament that ended on Sept. 7 was the least productive in 17 months amid clashes between the government and opposition parties.

The yield premium on dollar bonds sold in Indonesia was 260 basis points on Nov. 19 versus a spread of 372 basis points for notes in the U.S. currency in India, JPMorgan Chase & Co. indexes show. Both nations are ranked Baa3 by Moody’s Investors Service, the rating company’s lowest investment grade.

“During the financial crisis when balance sheet availability from foreign banks reduced, numerous local banks stepped up,” said Sameer Chandra, the Mumbai-based director of loan syndications at Citi India, a unit of Citigroup Inc. “But this time, there’ll be a likely tightening of incremental approvals from many local banks, which have been experiencing a rise in restructured loan portfolios, and only a few global banks appear to have higher risk appetite.”

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