Send Out New Year Invites

Context: Reserve Bank of India’s (RBI) recent softening of stance to the idea of Indian corporates potentially running banks should result into Opening India Inc to foreign lenders.

Dependence on Foreign Credit:

• Due to increase in the stressed sectors: India had been battling one of the world’s worst bad debt problems in its financial sector even before the pandemic. Recent failure support includes:
• Failing Lakshmi Vilas Bank has been sold to Singapore-based DBS.
• US fund Oaktree lent ?2,200 crores to Indiabulls Housing Finance and is also bidding for the bankrupt DHFL (Dewan Housing Finance Corporation Ltd).
• Decline on domestic credit growth: giving way for foreign lending
• Foreign funds have put in almost $1.5 billion in Indian distressed assets year-to-date, 55% more than all of 2019.

India’s Bad Loan Economy:

• India is the world’s worst large economy when it comes to bad loans; Non-performing assets (NPAs) are expected to rise more than 12% as per RBI’s baseline scenario. Structural issues:
  • Requirement of approval for a ticket size above $750 million;
  • Pricing capped at uncompetitive levels (London Inter-Bank Offered Rate plus 450 basis points);
  • High hedging costs due to inflation differential and low rupee liquidity;
• Judicial interference: Supreme Court’s order forbidding Scheduled Commercial Banks (SCBs) from recognizing Covid-induced NPAs has accentuated the crisis. (it is pushing banks to window-dress loans).
  • As foreign lenders find a lack of legal protection, formal lending dominated by domestic SCBs.
  • Most foreign lenders prefer to move funds through local entities so they can come under RBI or SEBI (Securities and Exchange Board of India) protection while enforcing a legal recourse.

Way Forward:

• Open Indian companies: both stressed and prime performers, to foreign lenders.
• Indian companies can tap cross-border debt via External Commercial Borrowing (ECB), or by issuing securities to foreign portfolio investors (FPIs).
• A low withholding tax on interest payments: may come as a breeze to foreign lender economics.
• Non-Indian entities should get equitable treatment: and suitable legal recourse from authorities when Indian counterparty defaults.

Conclusion: Fortunately, while India does have a healthy forex reserve amounting to $568 billion, the regulator should allow market access and free price action to take care of the rest.