Companies have slowed down overseas borrowing as external commercial borrowing (ECB) rates have moved up with the tightening of credit markets as a fallout of the European crisis. The total amount of ECBs companies proposed to raise in November fell to $1.58 billion, about $0.82 billion lower than the previous month, according to data from the Reserve Bank of India. In July 2011, companies raised about $4.16 billion, which fell to $ 3.70 billion in August, and then to $2.3 billion in September 2011. In 2011, the interest rate differential was forcing many companies to tap overseas markets for funds. The money raised by India Inc till October in this financial year (2011-12) was close to $30 billion compared with $22 billion and $13 billion in 2010 and 2009, respectively, according to the data provided by the central bank. However, the fund raising is slowly tapering off as highly risk-averse overseas investors are preferring to hold on to their money or invest in safe assets like the US treasury.

In October, RBI eased some of the regulations for ECBs enabling companies to borrow up to $750 million under the automatic route, up from the earlier limit of $500 million without seeking approval from RBI. Companies are also allowed to partially repay rupee loans through the ECB route. But for every $100 borrowed overseas, companies have to invest $75 in new projects while the balance $25 can be utilised to repay rupee debt. Companies can also borrow in Chinese yuan with an upper limit of $1 billion.

Partho Mukherjee, president for treasury and international banking at Axis Bank, said there is a funding squeeze due to the European debt crisis. "The risk aversion among overseas investors is very high. Foreign investors like foreign banks, who provide ECBs, are highly concentrated in the AAA or AA space and markets lack appetite for issuers with lower credit ratings. The spread in the Libor-OIS is widening which means there is stress in the overseas credit markets.”

Deepali Bhargava, chief economist at research and brokerage firm Espirito Santo Securities, said in a research report, “The availability of foreign credit may now be in question given the US dollar shortage faced across the globe. The OIS-Libor spread has been a closely watched barometer of distress in the money markets. Rising funding pressures and reluctance to lend is also reflected in the OIS-Libor spread for the US.”