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Rationalising Debt

twitter-logo Prosenjit Datta   Delhi     Print Edition: June 19, 2016
Prosenjit Datta, Editor, Business Today

In 2003, the global economy started growing rapidly, after two years of lacklustre growth following the great tech crash of 1999/2000. The growth peaked in 2006, and the year 2007 continued to be nearly as good. In the western countries, the growth was largely fuelled by a housing bubble and a boom in the financial markets that were creating and trading in all sorts of exotic instruments. Only a small fraction - less than 10 per cent by some estimates - went to businesses that were not in the real estate or finance sectors.

In developing countries - especially the BRIC nations - growth was driven more by real industrial capacity creation and growing consumer demand. Among the corporate houses in India, this was a time of great optimism and most big companies and groups chalked out highly ambitious growth plans, which included big greenfield projects as well as domestic and overseas acquisitions. Companies were drawing up humongous investment plans in every sector. Most of them borrowed heavily from banks and also issued debt instruments to finance their plans. The period 2004-2008 saw an industrial credit boom in India, with a big chunk of money going to infrastructure and realty.

In the US and Europe, the problems in the financial sector were apparent as early as 2007, but it was in September 2008, when the Lehman Brothers filed for bankruptcy protection that the real crisis hit. Lehman Brothers was the single biggest company to have filed for Chapter 11 bankruptcy protection till then.

The Lehman Brothers' crisis roiled the global financial markets and most economies around the world were faced with an abrupt slowdown. In the US, the way to stave off the unprecedented crisis was a government stimulus.

In India, though, the full effects of the global economic slowdown was not felt even in 2009. By 2010, the government had realised that India was not exactly insulated from the global crisis even if the worst had been avoided. To keep the economic growth from slowing further, the Indian government decided to provide a mild stimulus to the economy and encouraged companies, especially infrastructure companies, to take even more loans. The idea was that as more projects got off the ground, the economy would start growing fast again.

In theory it was a good idea, but it didn't work out well in practice. Banks, especially public sector banks, lent money aggressively to all sorts of companies, without exactly examining cash flows or project feasibility too carefully.

The fact that the UPA government itself was making all sorts of mistakes and was in the grip of a policy paralysis made many projects unviable. By 2013/14, Indian business groups and companies had enormous debt on their books, some of which could clearly not be serviced easily because their revenue projections were badly off the mark. Meanwhile, public sector banks saw their non-performing assets or bad loans rising to crisis proportions.

In the past two years, several companies - especially the big ones - have tried to rationalise their debt. Some have done it proactively, while others have been pushed by banks (which in turn were prodded by the Reserve Bank of India). Some have just tried to sell off assets acquired during better times. Others have refinanced debt, swapping high-cost debt with low-cost ones. Still others have raised equity to reduce the debt burden.

Our cover story by Managing Editor Rajeev Dubey looks at how companies have started managing their debt actively, and what are the lessons that can be learnt from the best ones.

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