Low demand for funds

by Manasi Swamy

Long-term fundraising by non-banking enterprises in India remained subdued in the first quarter of 2021-22. They raised Rs.1.27 trillion through the primary capital market, which was the lowest quarterly mobilisation from primary capital markets since June 2018. Of this, Rs.257.9 billion were raised against issuance of fresh equity, and the balance Rs.1 trillion were raised through debentures. The borrowings through debentures were at their lowest in the last 12 quarters.

Scheduled commercial bank (SCB) credit has traditionally been the largest source of fund raising for Indian enterprises. Fund raising through this source remained muted during the first two months of 2020-21. In fact, repayments of existing loans exceeded fresh credit availed by non-banking enterprises by Rs.937 billion during April-May 2021. This is not unusual. Repayments of SCB credit by enterprises are normally higher than fresh credit offtake in first few months of a fiscal. Net repayments of SCB credit by non-banking enterprises during April-May of last year were of the tune of Rs.1.1 trillion.

Enterprises made gross borrowings from overseas in the form of external commercial borrowings (ECB) worth Rs.230.5 billion during April-May 2021 as compared to Rs.188.9 billion a year ago. They raised Rs.1.3 trillion through foreign direct investment (FDI), which is huge surge over the FDI of Rs.30.8 billion received in April-May 2020. A bulk of the FDI ECBs and FDI inflows had slumped to exceptionally low levels in the beginning of 2020-21 due to the Covid-19 shock. A sharp y-o-y increase recorded by these in the initial months of the current fiscal, therefore, is not of much significance. When compared with average inflows during the last nine months of 2020-21, both ECBs and FDI do not show any jump.

The Reserve Bank of India (RBI) has not released the data of SCB credit, FDI and ECBs for June 2021. We believe that total long-term fundraising by non-banking enterprises through all five sources equity, debentures, bank credit, ECBs and FDI in the June 2021 quarter would remain below Rs.2 trillion. If this turns out to be true, April-June 2021 would be the quarter of lowest long-term fundraising by non-banking enterprises in the last two years. This drop in nominal fund raising is significant considering that inflation averaged 5.5 per cent in the last two years and has inched up to 5.6 per cent in the first quarter of 2021-22.

Enterprises raise funds mainly for the purpose of capacity expansion. But, currently they are saddled with excess capacities. According to the order books, inventory and capacity utilisation survey (OBICUS) conducted by the RBI, average capacity utilisation of manufacturing companies was as low as 66.6 per cent in December 2020. This was the time when pent-up demand had got unleashed after the lockdown. Capacity utilisation of the manufacturing sector, in all probability, has dropped further following the second wave of Covid-19.

Idle capacities, along with uncertainties related to Covid-19 pandemic and weak demand outlook prompted enterprises to put their capacity expansion plans on backburner soon after the outbreak of the pandemic. CMIE’s CapEx database shows that average quarterly industrial & infrastructural project completion dropped to Rs.770 billion in 2020-21 from Rs.1.4 trillion in the preceding five years. Information available so far shows that project completions remained weak in the first quarter of 2021-22. Announcement of new investment projects have also fallen to a trickle.

Non-banking enterprises had mobilised Rs.16.6 trillion long-term funds in 2020-21. This was the third largest fundraising in the Indian history.

If enterprises had decided to keep their capacity expansion plans on hold, what were they raising these funds for?

We studied the 2020-21 interim financial statements of 3,000 listed non-finance companies in pursuit of the answer. These show that the companies deleveraged and possibly raised fresh capital at better terms than earlier. Their debt-to-equity ratio shrunk from 0.72 times in 2019-20 to 0.58 times in 2020-21. Aggregate share capital of the sample companies increased by six per cent. This increase is in sync with the overall rise in equity issuances the primary market reported during 2020-21. But, outstanding debt of these companies shrunk by 4.3 per cent when total issuance of debentures in the primary capital market surged to an all-time high of Rs.8.5 trillion. This indicates that companies reduced their overall debt and also rejigged their debt portfolio in favour of lower costs. The latter point is evident in the 100 basis points shrinkage in interest incidence in 2020-21.

The RBI pumped in huge liquidity after the Covid-19 pandemic hit India. This brought down lending rates. Marginal cost of fund-based lending rate (MCLR) of banks declined by 85 basis points during 2020-21. Weighted average yield on AAA rated corporate bonds also shrunk by 268 basis points for residual maturity of 1-year, by 158 basis point for 3-years, by 60 basis points for 5-years and by 35 basis points for 10-years. Corporates decided to use this opportunity to replace their old high-cost debt by fresh borrowings at lower interest rates and succeeded in reducing their cost of borrowing. This would have long term impact on corporate profitability.

We believe that companies do not have an appetite for raising funds aggressively, yet. Need for funds for capex is still low. It is also likely that the restructuring of the debt portfolio to reduce cost of borrowing may have been accomplished and interest rates are unlikely to drop any further. Therefore, there isn’t much justification for raising fresh capital.