Corporate Strategies to Control Borrowing Cost – V.P Nandakumar
Based on my experience I would like to share a few thoughts about Indian corporates can lower borrow-ing costs to improve their profitability. As I see it, the CFO and the team handling the finances of the company have two primary responsibilities. In a competitive market, it is their responsibility to keep the cost of borrowings down to the barest minimum. Equally, they have to manage or arrange access to ad-equate debt and equity capital to finance the growth plans of the company.
In the matter of reducing cost of borrowing, they should focus on financing strategies that optimize cost of borrowing. One way to go about is to diversify the sources of funds, between banks, money markets and retail borrowings. It is often seen that going directly to the money markets can lower cost of funds. Another way, open to those large corporates financed under multiple banking arrangement or consorti-um lending, is to exit relationships with smaller banks that are unable to offer competitive rates of in-terest, or match the bigger banks.
After the financial crisis of 2008-09, the resort to unprecedented monetary stimulus by the major West-ern economies and Japan saw interest rates falling to historic lows in these countries. This was exploited by many Indian corporate by resort to external commercial borrowings (ECB). But, the sharp deprecia-tion of the Indian rupee in 2012 and 2013 was a timely reminder of the risks inherent in this gamble. At the same time, the recent record of the rupee against the dollar and other currencies—where it has been one of the best performing currencies in the emerging markets— has brought back the confidence in the Rupee. And so, as fears of volatility in the exchange rate recede, the ECB route can once again be considered again as an effective means to lower cost of funds.