Demand for offshore loans rises as India Inc. prepares for rate cuts and capital expenditures.

Photo-Reuters

Offshore financing, facilitated by the External Commercial Borrowing (ECB) route, has witnessed a notable surge among Indian companies during the fiscal year 2023-24, up until February. The data released by the Reserve Bank of India indicates an impressive 82 percent increase in ECB registrations in terms of value, reaching a total of $41.5 billion. This marks a substantial rise compared to the $22.8 billion recorded during the corresponding period of the previous fiscal year. What's particularly striking is the shift in trend from net outflows of $4.7 billion in the previous year to net inflows of $3.7 billion during April-February 2023-24, as highlighted by the RBI data.

The allure of offshore loans through the ECB route lies in their versatility, offering Indian companies a broad spectrum of applications ranging from capital expenditure (capex) to acquisition of assets and debt restructuring. The surge in demand for offshore financing is primarily attributed to the heightened capex needs of India Inc. According to the RBI's March bulletin, a significant portion of the ECB registrations during April 2023 to January 2024 was earmarked specifically for capex purposes, including on-lending and sub-lending for capex endeavors.

Dr. Sunil Kumar Sinha, Principal Economist at IndiaRatings, underscores the significance of this uptick in capex financing, particularly for greenfield projects. He notes a palpable shift in corporate sentiment, with companies displaying a renewed willingness to embark on greenfield capex ventures after a prolonged period of dormancy. Despite prevailing geopolitical uncertainties, Indian corporates are increasingly inclined towards proactive investment decisions, buoyed by resilient economic indicators and favorable growth prospects, especially in the wake of the robust performance of the US economy.

Sectors such as renewable energy, cement, and steel are witnessing a surge in greenfield capex, driven by government initiatives like production-linked incentives (PLI) and the burgeoning digital economy. However, Sinha emphasizes that while certain sectors like chemicals and textiles may exhibit a slower pace of traction, signs of momentum are gradually emerging across the board.

Moreover, the surge in offshore loan demand is bolstered by expectations of impending rate cuts and conducive market conditions. Aniket Dani, Director- Research at CRISIL Market Intelligence and Analytics, highlights the dominance of large corporate groups in external borrowings, with expansion and refinancing emerging as primary motives. He underscores the significance of external borrowings in fiscal year 2024, particularly in facilitating modernization efforts and addressing the financing needs of lending institutions.

Overall, the surge in offshore financing underscores the resilience and adaptability of Indian corporates in navigating complex economic landscapes, leveraging external sources of funding to propel growth initiatives and capitalize on emerging opportunities in a rapidly evolving global economy.

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