Overseas borrowing, a double-edged sword?

Overseas borrowing, a double-edged sword?

Overseas borrowing, a double-edged sword?

For Mains

Ways for companies to earn Capital:

  1. Infuse excess earnings into the company through retained earnings.
  2. Dilute the stake of existing shareholders of the company by creating a rights issue to infuse equity capital into the firm.
  3. Borrow money from banks directly, NBFCs or the open market through issuing bonds/debentures.

Why companies prefer to borrow in foreign currencies

  • Borrow money from banks directly, NBFCs or the open market through issuing bonds/debentures.

What are the concerns in borrowing in foreign currencies?

  • If the domestic currency were to decline compared with the foreign currency, the company is liable to pay more than it had bargained for in real terms.
  • Therefore, the currency risk must be offset by your revenue denominated in the foreign currency or by some other measure.
  • A revenue earned in foreign currencies may not be a sufficient hedge for companies borrowing excessively due to low-interest rates.
  • The problem with borrowing in the current environment is the impending risk of a recession due to increased interest rates to curb inflation.
  • The effect of rising rates has two facets, the first being the threat of lower earnings from a shrinking economy, and the second being the depreciation of the rupee compared with foreign currencies.
  • Although the borrowing of these companies remains constant, their revenues decrease due to a recession, increasing the real burden of their debt.

 

  Source The Hindu