Risks Of Foreign Loans
| Date :02-Aug-2019 |
However long term, the day of reckoning for any loans should one day come. At the end of the long term loans will dawn the day of repayment. If many such long term loans mature, then there would be bunching and repayment problems some time or other.
RESERVE Bank of India has further eased the norms for external commercial borrowings (ECB) for the corporate sector. Among many other activities, the RBI now allows such ECBs for repaying rupee loans, including outstanding non-performing or sticky loans. These sticky loans could also be sold to willing overseas buyers of such portfolios. As such, this is good so far as it takes the pressure on domestic capital markets and any such ECBs could in effect augment the availability of funds within the country. The emphasis is on the tenure of such loans, that is, the loans must be ten years maturity.
Recently, the former RBI Governor, Dr. Bimal Jalan, observed that there is no need to worry about foreign sovereign bonds as long as these are long term. The emphasis in external borrowings has always been on tenure and the policy makers have never tired of pointing out the deferred liability of such borrowings. However long term, the day of reckoning for any loans should one day come. At the end of the long term loans will dawn the day of repayment. If many such long term loans mature, then there would be bunching and repayment problems some time or other.
Justifying issue of foreign sovereign bonds on the basis of their long-dated maturity cannot possibly be very sensible, even with due deference to Dr. Jalan. After all, he was the head of RBI at the time of the “Asian flu” days and under his superintendence, the country managed to tide that crisis sagaciously. But possibly, not many of India’s long term loans had matured at that point of time. Since Finance Minister Nirmala Sitharaman announced the plan to issue foreign sovereign bonds, we have been witnessing a flutter of arguments from all sides about the implications of such a step.
What is at the bottom of it all. So far, we have funded deficits in Government finances from domestic sources. That is, the Government issued securities in the domestic capital markets and raised the monies needed for its excess expenditure. The proposal for foreign sovereign bonds shifts this overseas —we will borrow from global capital market to meet the shortfall between Government in Government’s income over its expenditure. As a matter of principle, we have admitted that Government deficits must be curtailed and kept within limits. This is the import of the FRBM Act.
The present Government is committed to keeping deficit to 3% of GDP by 2021. At that level of deficit, why should we have to go overseas for raising loans. Is that an imperative. Imagine that we successfully raise loans —of sufficient long dated tenure— and manage these cautiously, what is the guarantee that a future Government would also follow that path. In case, you are accustomed to cheap loans from overseas, would you have the compulsion to keep your expenses down and not resort to overseas funding whenever needed. Currently, one silver lining for India’s finances is that exposure to external loans is limited.
These do not really pose any threat to India meeting its external payments obligations. By getting used to overseas loans for covering deficits in public fences, would only undermine that in future, There are several other considerations. We have adopted market-related exchange rate. Large scale sovereign bonds issued in overseas markets could have implications for the exchange rate as well. When the exchange rate is showing signs of strengthening, sovereign foreign bonds could further bolster that tendency. Contrarily, large repayment obligations could drive down rates. Government entry into overseas capital markets for meeting its own funds requirements could inevitably influence the exchange market and create fresh difficulties for policy makers and the RBI. Various complementary steps would have to be taken in the light of Government capital raising.
This is all the more likely to happen since the Indian exchange market is not too deep and some bunching of deals even now cause the rates to flutter. And then when the Government seeks to raise funds from overseas markets you have to swallow the fact that you will be on the constant monitoring radar of the credit rating agencies. Even otherwise, the rating agencies have this propensity for hectoring. When you have large exposure and stock of outstanding loans, or have plans for raising fresh loans, you have to put up with their hectoring all the more. Remember when a couple of years’ back credit rating agencies announced downgrading the US Government papers, the US department of revenue had to put up a gallant fight to show that the rating agencies were wrong and they did not really understand the complicated budgeting processes of US Government.
This is on top of the fact that US borrows in its own currency. In case of India it will have to borrow in US dollars or some other currency and bear the exchange risk on that, in addition to the whims and fancies of fund managers overseas. This is particularly true these days when there is so much concern about the interest rate decisions of the US Federal Reserve. The Fed’s interest rate decisions would influence whether an Indian sovereign bond issue would get adequate or overwhelming response. Maybe, we will exactly savour that.
The only positive aspects of such a decision could be that overseas bonds could be cheaper in terms of interest. Global invest rates are hovering extremely low at sub-2% levels whereas GOI securities carry much higher interest rates than that. But if you add the exchange rate fluctuations, the difference could become much less. The other point is that increasing value of Government borrowing is crowding out private sector borrowers and could be one of the reasons for falling investment levels. Government shifting its funds requirements out could alleviate that situation to an extent. But then one way to meet that could be to make ECBs increasingly easier for the private sector — something that has been happening over the years and the last move was only in the current week. (IPA)