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Guess where half of India's funding came from in 2016? Not banks

A study by the central bank-funded CAFRAL showed that ECBs were utilised heavily until 2012.

, ET Bureau|
Updated: Oct 02, 2017, 03.57 PM IST
ECBs were utilised heavily until 2012 just before the rupee began a slide against the dollar.
ECBs were utilised heavily until 2012 just before the rupee began a slide against the dollar.
MUMBAI: More than half of India Inc's 2016 funding needs came from non-bank sources such as corporate bonds, commercial paper, and external commercial borrowings (ECBs), up from a fifth in 2005, with high street lenders choking credit supplies because of the rising pile of sticky loans.

A study by the central bank-funded Centre for Advanced Financial Research and Learning (CAFRAL) showed that ECBs were utilised heavily until 2012 just before the rupee began a slide against the dollar.

“The depreciation of the Indian currency against the dollar in 2013 prompted Indian corporates to substitute ECBs with domestic corporate bonds. CP issuances now constitute a significant segment and represent roughly 25 per cent of non-bank credit. This implies that in the context of growing financing needs in the economy, the importance of non-bank credit is also rising,“ Apoorva Javadekar, research director at CAFRAL, said in a note titled NonBank Funding Sources and Indian Corporates.

However, the shift is more pronounced in case of small and medium enterprises with sound financial health instead of large companies. The study analysed the correlation between firm size and bank NPAs to test if small and large firms are affected differently due to banking stress. It found that the coefficient between NPA and firm size was negative. In other words, large companies were less likely to shift away from bank funding due to stress in the banking system.

“There are two possible explanations for this rather unexpected result. First, is the evergreening effect, whereby banks roll over the credit to large firms since it would entail making large provisions. The second explanation is that a banking relationship with large borrower is valuable and hence banks strive hard to maintain it by supplying credit even in times where the bank is capital constrained. The upshot of this process is that it effectively rations out smaller firms with poor financial health from the bank market,“ Javadekar said in the note.

However, large companies can access the market even in poor financial health, which is not the case for small and medium companies.

“This leaves the subset of small firms with poor financials in a vulnerable situation. Current policy is focussed on debt recoveries from larger borrowers. The results indicate that bolstering the funding sources for efficient but liquidity crunched small and medium-scale enterprises is also likely to be important in arresting the next wave of NPAs,“ concluded the study .

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