Foreign funding is back again

Mumbai

Aug. 16: Foreign funds are betting big on the Indian industry again. The trend of domestic funding replacing foreign funding, which was witnessed last year, has reversed this year with foreign funding such as external commercial borrowings, QIPs, ADRs and GDRs picking up.
What is interesting is that risk capital which QIPs (qualified institutional placements) represent is coming in, but banks are still reluctant to join the party.
QIPs are, in the hierarchy of capital, risk capital as they subscribe to the primary markets like initial public offers and rights issues. QIPs have been preferred by the companies, especially infrastructure and real estate companies, sectors in the recent past.
The rise in industrial production in the index of industrial production (IIP) would suggest that this is due to bank finance but this is not so, says Mr Dipankar Mitra of the Noble Group investment bankers. The industrial sector absorbs the maximum credit. After the global financial crisis started with the downfall of Lehman, bank credit fell by over five per cent in India.
Mr Mitra said the rise of IIP, which was up 7.8 per cent in June on top of a high base of 5.4 per cent recorded in the same period last fiscal, would suggest a revival of bank credit gro-wth in the coming months as the industrial sector is the most credit intensive sector.
However, the latest data pertaining to July 31, 2009, so far indicates a mere 16 per cent year-on-year credit growth. The Reserve Bank of India data also points towards substantial substitution of bank finance by external sources of finance such as ECB, QIP and ADRs and GDRs, which may facilitate industrial recovery while keeping the credit growth muted.
Basically, it shows that bank credit has not picked up yet and that the substitution of domestic funds by foreign funds is happening.
This could be a good development for business and industry, even though it may not solve the problems of the micro and small and medium enterprises.
However, bank credit is expected to grow further in September, when the busy season as the RBI calls, picks up.
The IDBI chairman and managing director, Mr Yogesh Agrawal, credit growth is a function of how the economy is faring and it cannot grow in isolation.
Though SMEs do not have the luxury of tapping funding funds, Mr Agrawal said the banks will continue to be a source of credit and will consider all bankable projects.