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In an interview with ET, Shashank Joshi, head of global corporate banking for India, MUFG Bank, talks about the dynamics of Indian credit market in the background of rising rates in the US, IBC and challenges for foreign banks here.

Edited excerpts:
The Insolvency and Bankruptcy Code (IBC) has made the takeover of stressed assets easier. How will it affect the Indian credit market?

The developments in the IBC are extremely positive from an Indian credit markets perspective.

With resolution now being time bound, a lot of lenders will be happy to look at Indian credit markets favourably. Importantly, it puts together a strong legal and regulatory framework for resolution of tough cases that dragged on for years.

In some large distressed cases, lenders expect to recover a reasonable amount of their loans in a transparent manner, so overall it is extremely credit positive.

A secondary effect is that with the new managements coming in (of reputed promoters in similar business lines), the overall credit profile has improved and that allows incremental lending. A lot of projects that were stuck will be revived through structured and secured refinancing leading to fresh credit off-take.

How the rising US rates will affect the overseas borrowing plans of Indian companies?

The demand for G3 (China, EU and US) bonds has been muted this year. Last week, MUFG led a USD bond for Power Finance Corp for $400 million, reopening the market after four months. US Treasury yields are expected to increase going forward.

The Street is estimating two more rate hikes this year and another two-three next year. However, this shouldnt dampen the supply from India for two reasons: Firstly, we dont expect the all-in cost to increase substantially compared to current levels and, secondly, given the financing requirements to sustain growth needs of corporates and the economy, Indian companies will have to look to offshore markets.

India continues to be one of the positive stories and of late had taken a safe haven status among international investors.

So, once companies have come to terms with the current pricing levels, we believe they will return to the offshore bond markets.

Why is there a preference for external commercial borrowings this year compared to dollar bonds?

In the last four-five months, we have seen a peak divergence of nearly 50-60 bps in spreads between loan and bond markets for top-rated Indian issuers. Because of this significant pricing difference, many Indian companies have decided to hold off on their USD bond plans and taken the ECB route instead. While investors have been unwilling to take duration risk in interest rates, liquidity has largely not been a big concern. Hence, ECB demand linked to Libor has been evaluated favourably.

For companies that have long-term requirements, the bond market will continue to be the preferred option.

Additionally, given the rising rate expectations, we anticipate that some companies will go for the bond market albeit at slightly higher pricing because of the fixed rate nature of those instruments.

The IMF predicts a good economic outlook in the election year. What sense are you getting from global investors?

Investors are keenly following the elections rhetoric, but they continue to be positive about Indian credits in general.

India still contributes a fairly smalls share (~6%) of the total supply from Asia in the G3 bond market.

With regards election outcome, investors would seek a stable government and an intention towards continuity of policies and furthering of some of the reforms that have taken place. If this happens, post elections we could see an increased appetite for Indian risk from investors.

Will the foreign direct investment flows increase?

The FDI investor is more concerned about macro political, regulatory, fiscal scenario and less about shortterm currency movements. Currency move is generally seen as a combination of general US dollar strength and oil price movement.

On the latter, the jury is divided in terms of next move up or down and, hence, limited concerns. However, they remain vigilant for signals on politics, impact on fiscal of oil price.

State-owned banks are a bit hesitant to lend now. Is it an opportunity for others?

This is indeed a large opportunity for well capitalised private banks, NBFCs and funds/FPIs and, to some extent, foreign banks.

However, the banking sector is at an interesting stage, as some private banks are in the midst of management changes, new wholesale NBFCs and private banks have constraints around liquidity ratios and the new regulations (co-investment for FPIs) is still being digested by overseas investors. So, while the opportunity space is large, each of these segments will need to invest intellectual capital to work out the right solutions and structures that are able to participate in this large lending opportunity.

What is the key challenge for foreign banks in India?

Foreign banks in India do not have a large duration risk on their credit book. This has been constrained due to a variety of issues — chief among them being priority sector lending requirements, INR liquidity ratios and Basel III returns. Given the fact that foreign banks evaluate capital deployment linked to Basel returns, they have been unable to participate in the credit growth in the MME and SME businesses.

Considering the retail footprint remains a constraint; participation in the retail consumer finance space too has not taken off. Given the expected doubling of the Indian economy in 5 to 7 years, credit growth and banking sector growth are inevitable and the opportunity for foreign banks is extremely large.

A potential game changer for larger foreign bank participation could be a change in the sovereign risk rating. With reforms in IBC, faster legal resolution and ease of doing business indices increasing, we expect a lot more FDI and revival of the capex cycle in the next 12-18 months. This demand can be met through foreign banks effectively.

How does MUFG plan to expand in India?

India continues to be a high-growth market for us. We are focused on serving our large corporate and financial institution (FI) customers and seek to grow in this segment. We have led some of the most strategic and marquee deals for our top clients in capital raising and M&A finance.

Original Article

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