Frustrated Modi Leaves India Loan Bankers Idle as Plans on Hold

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Indian companies are on a go slow, leaving loan bankers idle.

Syndicated lending fell 8 percent in the second quarter from the previous three months to $1.1 billion, set for the lowest volume since the period ended September 2013. Borrowers have put expansion plans on hold, waiting for Prime Minister Narendra Modi to deliver on growth-boosting legal changes.

“Capacity utilization for many manufacturing companies remains at modest levels and unless demand improves, fresh capital expenditure for expansion appears unlikely,” said Sidharth Rath, president for treasury in Mumbai at Axis Bank Ltd., the second-biggest arranger of overseas loans. “Many companies haven’t gone ahead with their borrowing plans.”

One year in and Modi is grappling with stalled projects and souring bank loans, while a bill to ease land ownership rules is stuck in the upper house of Parliament. Stressed assets at Indian banks rose to almost 11 percent of total lending as of March 31 and the infrastructure backlog of delayed projects has climbed to 13.5 trillion rupees ($212 billion), official data show.

Borrowers Halved

Hindustan Petroleum Corp., Reliance Utilities & Power Pvt. and Rural Electrification Corp. were the only borrowers in the syndicated loan market this quarter, according to data compiled by Bloomberg. That’s half the number of last quarter, while total loans the first six months of $2.3 billion compare with $7.7 billion the second half of 2014, the data show.

Bharat Petroleum Corp. decided to postpone a $500 million five-year facility in April after seeking proposals from lenders earlier that month. Steel Authority of India Ltd. still hasn’t proceeded with a $200 million loan after getting feedback from banks in December.

In April, Reliance Power Ltd. terminated a 3,960 megawatt project in Jharkhand state after failing to secure land after six years. The decision will reduce its capital expenditure requirements by 360 billion rupees, it said.

Fundraising slowed even as the average margin on loans denominated in either U.S. dollars, euros or yen fell to 126 basis points over benchmark rates, the least since mid 2007.

“The investment cycle of India Inc. is yet to pick up,” said Prabal Banerjee, Mumbai-based president for finance and strategy at the Bajaj Group conglomerate. “This has led companies to hold back their major borrowing plans. No company wants to add leverage unless there’s a corresponding return visible in medium term.”

Interest Rates

India will spend 1 trillion rupees on ports, power stations and roads this year, Junior Finance Minister Jayant Sinha said earlier this month. According to World Economic Forum estimates, Asia’s third-biggest economy needs to find some $640 billion by 2031 to develop its urban infrastructure, and the funding gap is about $80 billion to $110 billion.

Reserve Bank of India Governor Raghuram Rajan has reduced the benchmark repurchase rate by 75 basis points to 7.25 percent in three moves this year and economists forecast it isn’t done yet. Deutsche Bank AG said on June 19 it expects another 25 basis-point reduction because “monetary transmission is proving to be insufficient.”

Even though interest rates have moderated, they still “need to come down further to improve corporates margins and viability of new projects,” Axis Bank’s Rath said.

Global Environment

Concerns over rising U.S. interest rates and possible default by Greece are damping sentiment in emerging markets. The rupee has weakened 1.8 percent against the dollar this quarter, the fourth-worst performance among major currencies in Asia after the Thai baht, Japanese yen and Indonesia rupiah.

“Companies will gauge external developments, such as the outcome for Greece, and will expect spreads on U.S. Treasuries to compress some more” before they decide on borrowing plans, Ajeet Agarwal, the New Delhi-based director of finance at Rural Electrification said in a phone interview June 24.

The lender to electricity projects is planning to borrow as much as $300 million via a five-year facility by the end of next month. It hired Bank of Baroda, Mizuho Bank Ltd. and State Bank of India for a $300 million loan in May.

Borrowing costs have stayed low. The yield premium for Indian dollar bonds over Treasuries has fallen 12 basis points this quarter to 254.3 basis points as of June 25, JPMorgan Chase & Co. indexes show. The spread for investment-grade notes in Asia has been stable at about 192.

“There’s not enough need for borrowers to raise capital offshore,” said J. Moses Harding, Kolkata-based chief economist at Srei Infrastructure Finance Ltd., a non-bank funder of projects and equipment. “There’s no great pickup in full utilization of existing capacity or consumption demand.”

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