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Some Important Considerations For Your Business Financing Decisions

  Jun-25-2018 |  445
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Corporates looking to acquire funds through business loans to meet up their CAPEX plans or any other business requirements would need to pay attention to rising interest rates domestically. In first week of June 2018, the Reserve Bank Of India (RBI) recently delivered its first interest rate hike in nearly four and half years. The RBI Monetary Policy Committee (MPC) unanimously agreed to hike repo rate by 25 bps, though they kept the stance as neutral.

The MPC noted that while inflation in recent past has evolved according to RBI projections, the sharp rise in crude prices coupled with general increase in global commodity prices and uncertainty on impact of MSP increase may lead to higher inflation, though expectations of good monsoon should keep food inflation benign. Accordingly, the inflation forecast for 2HFY2019 was increased to 4.7% from 4.4%. Further, the MPC noted that growth prospects were improving with better capacity utilizations, increasing credit offtake and acceleration in investment activity.

The Indian economy faced a challenging times in past two years. After facing twin shocks (Demonetization and transition to GST system), the economic growth eased in Q1 FY18. Since then Indian economy has been on uptrend. Benefitted by favorable base effect, normal monsoon and pick-up in economic activities, Indias Gross Domestic Product (GDP) grew by 7.7% in the fourth quarter of fiscal year 2017-18, faster than the revised 7% expansion seen a quarter ago, according to data released by the Central Statistics Office (CSO). Indias economic growth accelerated more than expected in the March quarter. The overall faster growth was driven by a 4.5% rise in agriculture, a 9.1% rise in manufacturing and 11.5% surge in construction. In the fiscal year 2017-2018, the economy advanced 6.7% from the same period of last year.

The medium term outlook is excellent for the economy. The domestic economic growth is forecast to rebound to 7.4% in FY 2018/19 as the economy recovers from disruptions related to the currency exchange initiative and the rollout of the new Goods and Services Tax, the IMF said in a latest update. Asia continues to be the main engine of the worlds economy, accounting for more than 60% of global growth - three-quarters of which comes from China and India alone. But there are risks and challenges ahead, including from a tightening of global financial conditions, a shift toward inward-looking policies, and - over the longer run - population aging, slowing productivity growth, and the rise of the digital economy, according to the IMfs latest regional report.

With the central bank delivering its first interest rate hike in nearly four and half years, there is bound to be some upward pressure on the levels of general interest rates for the corporate and households. According to the RBI data, the domestic non-food credit growth hit a 3 year high of 12.74% in May 2018, extending its recovery from record lows. Another hike in the interest rates by the central bank in coming months could hurt this recovery in the credit expansion. This is coming at a time when global interest rates are also on an upward trajectory, increasing the borrowing costs for the Indian companies looking to source funds from overseas. Indian companies borrowed $28.8 billion (Rs 1.86 lakh crore) through External Commercial Borrowings (ECBs) in 2017-18. An update from CARE Ratings states that the borrowings are likely to be around the same level or maybe slightly lower in 2018-19 on account of rising interest rates globally and a more volatile rupee

Thus, while the ECBs are more than likely to turn out of favor, more and more domestic firms would be chasing the domestic financial institutions for meeting their financing needs. All the businesses need enough credit and funds for smooth functioning and for ensuring steady expansion and a comfortable working capital position. Given the current scenario in the domestic economy and interest rates, now is the apt time to apply for a transparent and flexible business loan to fulfill a plethora of your business needs.

A few useful guidelines in this regard would come in handy for companies seeking to go in for financing solutions. Be clear about the purpose of the loan and lay out in clear terms how exactly it would let your business evolve in coming years. Lending entities would ask for a security while issuing loan. Decide in advance what would be offered as a security. Get a good idea about the interest rates and other fees in the market and check out the details minutely. Also, it is important to get a good assessment of the sector your venture is a part of.

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