External Borrowings may boomerang on Country’s economy in future

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At least seven companies including Aditya Birla Finance, Bajaj Finance, Tata Capital, HDB Finance (HDFC group) have raised only Rs.3544 crore which is equivalent to the 34% of the targeted amount of Rs.10,400 crore.

But the companies have failed to accrue the same as it seems bond investors are expecting better interest rate between 7.5% to 8% for three-year bonds. HDB Finance bonds for Rs.1200 crore were fully subscribed for three years at 7.30% per annum.

So it indicates that there are huge funds in the market, but the interest rate is the Yardstick. RBI opened a soft window, with a low-interest rate, to help NBFC with a fund of Rs.50,000 crore, as banks have not come forward to additional funding for NBFC, to keep funds for lending to MSME sector and to limping Corporates due to COVID 19. Now with this measure, RBI postponed the closing of Schemes by Mutual Funds like Franklin Templeton. So liquidity is preserved.

External Borrowing

As we all know due to Lockdown, Supply and Demand has severely affected the Indian manufacturing companies and service sector as well for the first time. People with meagre incomes have literally lost their jobs and they have now no job no money on hand. On the supply, side transport was a standstill, raw materials not in stock, many workers left to native places for safety of their families, no sales during last 40 days and sale proceeds made in February and March 2020 were delayed heavily.

Banking funds is the only solace for helping the distressed financial market. So the Government should not raise money by selling Bonds to banks so that they can use in turn all their resources for loans and advances to needy businessmen. The only solution is that raising external debts from IMF, ADB, Japanese Bank and European market to the tune of around Rs. 1.5 lakh crore to Rs.3 lakh crore as the country needs today.

World Bank observations

World Bank in its observations has mentioned that the Health system strained in Ethiopia and Yemen countries, more medical staff required in Haiti and Magnolia countries. Millions of children can’t go to school in Pakistan and need solutions for remote learning. In India support is required financially to the healthcare sector.

Hence sanctioned USD One billion (Rs.7600 crore) to purchase equipment, test kits, isolation centres etc to fight with COVID 19.

Budget declaration

While presenting the budget in February 2020 the Finance Minister Mrs Nirmala Seetharaman declared that external debt will be raised to maintain liquidity in the financial system, so that banks can Finance more funds to business people and MSME.

In line with this policy of External Borrowing on February 2, 2020, an agreement was signed with World Bank for a loan of USD 450 million which is Rs.3150 crore in Indian currency, for Atul Bhujal Yojana for improvement of groundwater in 78 select districts in Gujarat, Maharashtra, Haryana, Karnataka, Rajasthan, MP and UP. This is an 18-year loan with 6 year grace period.

Yesterday Asian Development Bank sanctioned USD 1.50 billion equivalent to Rs.12,000 crore in Indian currency to fight with COVID 19 for improvement of healthcare systems, food and medicine, the establishment of infrastructure for this. Government of India is pressing for increasing it to USD 10 billion equivalent to Rs.76,000 crore in INR for specific sectors like transport, airlines and MSME. But ADB informed that they are also in talks with the private sector to extend Credit Guarantee facilities to MSME in healthcare, agribusiness and Infrastructure.

Central Government already released Rs.15,000 crore to State Governments for medical expenses raised by COVID 19. Besides for the first time, a Sovereign Wealth Fund was created by the Prime Minister in February 2015, known as FOF (Fund of funds). So far FOF secured USD 700 million in commitment from CPPIB (China), Abudhabi investment Authority, Australian Super, Temasek, Ontario teachers Pension fund, banks like AXIS, HDFC, ICICI and Kotak Mahindra.

Now, it is to be seen whether how the Narendra Modi-led Government could overcome the current financial crisis due to COVID19.