Ac­cord­ing to the lat­est an­nual earn­ings re­ports, In­dia's cor­po­rate debt rose to a seven-year high at the end of March


IN­DIA’S cash crunch and con­fu­sion over the in­tro­duc­tion of a na­tional sales tax were ini­tially blamed for pulling eco­nomic growth down to its weak­est pace in more than three years. But that is mask­ing a more de­bil­i­tat­ing fac­tor af­fect­ing the econ­omy – cor­po­rate debt.

Thom­son Reuters data, based on the lat­est an­nual earn­ings re­ports, shows In­dia’s cor­po­rate debt rose to a seven-year high at the end of March. More than a fifth of large com­pa­nies did not earn enough to pay in­ter­est on their loans and the pace of new loans fell to the low­est in more than six decades.

The govern­ment re­ported on Au­gust 31 that an­nual GDP growth in the quar­ter ended June dropped to 5.7 per cent, an en­vi­ous pace for many coun­tries but In­dia’s weak­est since early 2014.

It was blamed on at­tempts by the govern­ment to flush out money hid­den from the tax­man, which caused a cash crunch, and the in­tro­duc­tion of a gen­eral sales tax (GST), which prompted busi­nesses and con­sumers to hit the pause but­ton.

But In­dian busi­ness ex­ec­u­tives say they are more con­cerned about the im­pact of soured loans on bank bal­ance sheets, which pre­vent them from get­ting the full ben­e­fit of cen­tral bank rate cuts. That is sap­ping In­dia’s eco­nomic vi­tal­ity, they say.

Since Jan­uary 2015, the cen­tral bank has cut pol­icy rates by 200 ba­sis points, or 2 per­cent­age points, but com­mer­cial bank bench­mark lend­ing rates have come down less, by about 120 ba­sis points. “In­ter­est rates are still very high,” said A Is­sac Ge­orge, chief fi­nan­cial of­fi­cer of GVK Power & In­fra­struc­ture. He said his firm’s bor­row­ing costs have re­mained un­changed at about 11 per cent.

That makes it tougher for the con­glom­er­ate to lower its net debt of around Rs 17,900 crore ($2.80 bil­lion).

GVK’s earn­ings cov­ered just half of its debt ser­vic­ing costs, Credit Suisse data shows, be­low the one per cent thresh­old typ­i­cally seen as a bare min­i­mum. “We are not in a po­si­tion to take a de­ci­sion on whether we should ex­pand our busi­ness or set up new busi­nesses,” said Ge­orge. GVK is not alone in try­ing to man­age high debts.

Thom­son Reuters data shows net debt for 288 firms with a mar­ket cap­i­tal­i­sa­tion of more than $500 mil­lion, cov­er­ing most big firms in In­dia, has hit at least a 7-year high of Rs 18,00,000 crore ($281 bil­lion). Soured debt was 12 per cent of to­tal loans held by lenders at the end of March. An­other Thom­son Reuters anal­y­sis showed more than a fifth of 513 In­dian com­pa­nies had in­ter­est cover of less than 1 per cent.

New loans are also hard to come by. RBI data shows bank credit growth fell by a quar­terly record in AprilJune. On an an­nual ba­sis, the pace of new loans in the year to the end of March, fell to the low­est since the fis­cal year ended in March 1954.

The im­pact can be seen in the GDP data. Gross cap­i­tal for­ma­tion, a gauge of pri­vate in­vest­ment, fell to less than 30 per cent of GDP in the June quar­ter, from 31 per cent a year ear­lier and 38 per cent a decade ago.

The Re­serve Bank of In­dia (RBI) has been re­luc­tant to cut rates too ag­gres­sively be­cause of con­cerns about con­sumer in­fla­tion. “It is only af­ter lend­ing rates come down that de­mand will re­vive to ex­haust ca­pac­ity and spark off in­vest­ment,” Bank of Amer­ica Mer­rill Lynch said in a note to clients.

RBI of­fi­cials though see the is­sue as a bank­ing one, and want the govern­ment to in­ject more funds into staterun lenders. In­dian banks needed “sub­stan­tial ad­di­tional cap­i­tal” from the govern­ment, RBI deputy gov­er­nor Vi­ral Acharya said.

Fitch Rat­ings said on Tues­day In­dian banks were likely to need about $65 bil­lion in ad­di­tional cap­i­tal, 95 per cent of it for staterun lenders, by March 2019, far above the $11 bil­lion bud­geted by the govern­ment.

The govern­ment says it stands be­hind the banks, but has yet to com­mit ad­di­tional cap­i­tal. It is push­ing in­stead for mea­sures to grant RBI more power to steer com­pa­nies through bank­ruptcy, a process an­a­lysts say could take years. The govern­ment has other op­tions. For­mer RBI gov­er­nor Raghu­ram Ra­jan, for ex­am­ple, pro­posed in a Reuters in­ter­view that New Delhi sell stakes in sta­te­owned com­pa­nies to fund a bank re­cap­i­tal­i­sa­tion.

“We would al­ways want to see lower rates, but I don’t see too much of a scope now to go be­low where we are to­day,” said Kumar Man­galam Birla, chair­man of the me­tals-tot­ele­coms con­glom­er­ate, Aditya Birla.

“At the end of the day if you have res­o­lu­tion to the NPA (non-per­form­ing as­set) prob­lem, that will cre­ate more space for the banks to start lend­ing again,” he said.

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