A recent ‘House of Debt’ report by the Swiss financial services firm Credit Suisse has shown the financial stress experienced by ten large Indian corporate groups to have intensified over the last three years. All the three major ratios of debt servicing — interest cover, debt-to-earnings and debt-to-equity — have suffered deterioration in the case of these groups. The fact that their overall debt has risen from Rs 653,200 crore to Rs 733,500 crore between 2012-13 and 2014-15, despite resorting to asset sales in order to deleverage their balance sheets, only shows the extent of stress, which may not be limited to just the ten groups. Recent months have, in fact, seen many new names — for instance, Amtek Auto — being added to the list of those defaulting or struggling to meet their debt obligations.
The above debt burden extending to large parts of corporate India has had two effects. The first is on the ability of the overleveraged companies themselves to undertake capital expenditures. The second is on the banks with significant exposure to these firms. The overhang of stressed loans, which Credit Suisse reckons at around 17 per cent of their total outstanding loans, has made Indian banks reluctant to make further project loans. It also probably explains their reluctance to cut interest rates even in today’s poor credit demand environment and despite the Reserve Bank of India’s 75 basis point repo rate reduction in the current year.
India’s policymakers, to their credit, have been fully aware of the challenges arising from the financial stress of major corporate groups. The Finance Ministry, in a mid-term review of the review of the economy last year, had acknowledged the concerns springing from over-leveraged private balance sheets and the need for higher public investments to compensate for India Inc’s inability to take up greenfield projects. But more than a year later, we are yet to see a pick-up in public investment, barring in roads where award of projects both under EPC (engineering-procurement-construction) and a new ‘hybrid annuity’ model seems to making some headway. On the other hand, there isn’t much happening in railways, contrary to the initial expectations. The government needs to walk its talk on public investments. Equally, there has to be quick action in enacting a modern bankruptcy law, which will allow infrastructure projects that have turned into bad loans to be speedily handed over to new promoters capable of attracting fresh financing.