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.
