The high quantum of impaired assets will restrict the credit growth for fiscal 2018-19 to 8 per cent, and India Inc will borrow more from cheaper sources abroad, a report said today.
External commercial borrowings (ECBs) will go up to USD 27-32 billions on the back of relaxed norms announced by the Reserve Bank of India and the high rate of borrowing domestically, ratings agency Icra said.
Despite recapitalisation of the state-run lenders and private sector players upping their game with a 25 per cent credit growth, the overall system credit expansion will come at 7-8 per cent, it added.
It can be noted that the country's banking system is supposed to have ended FY18 with a credit growth of nearly 11 per cent.
Icra's group head for financial sector Karthik Srinivasan said the state-run banks' problems will stem from the high provisioning needed for bad assets and the need to meet mandated capital requirements.
"With the relaxation in ECB norms offering an alternate avenue for corporates' borrowings, the credit demand pressure on the domestic banking system and the bond market would ease, thereby reducing the upward pressure on domestic interest rates," he said.
The agency estimated the ECB approvals to go up to USD 27-32 billion for fiscal 2018-19, from the USD 23.8 billion for the first 11 months of fiscal 2017-18.
In a bid to attract more dollar flows amid concerns over widening current account deficit, the RBI has stipulated a uniform, all-in cost ceiling of 4.50 per cent over the benchmark rate, which, in most cases, is the six-month London Interbank Offered Rate (LIBOR) for ECBs.
"The actual ECB inflows would be driven by the all-in-cost of ECBs remaining competitive in relation to domestic sources," he added.
The agency's principal economist Aditi Nayar said the rise in ECBs will help finance the larger current account deficit and may support the rupee in the short-term.