India's corporate debt problem has now reached alarming proportions. The Reserve Bank of India has pointed this out from time to time. A recent IMF Working Paper, published in December 2014, made the same point. Non-financial corporates in India have been on a borrowing spree since the global financial crisis of 2008. Between March 31, 2001 and March 31, 2008, the IMF paper points out, the BSE Sensex rose almost fourfold, while the value of BSE-listed entities went up almost ninefold. And therefore, equity issues became the preferred method of raising funds. Also, though a significant amount of debt was raised during this period by businesses, the overall rise in revenues and profitability ensured that debt-to-equity ratios remained under control, and debt servicing was never a problem.
Post-2008, most corporations relied on debt rather than equity for their funding needs. Easy availability of bank credit was one reason for this. The lacklustre equity markets were another. But what went unnoticed was that corporate balance sheets were becoming increasingly stressed. Post-2012, the Indian economy slowed quite sharply, but corporate borrowings showed no signs of coming down. A Business Today study of listed and unlisted companies shows that their debt has more than doubled in the past four years.The infrastructure sector especially was on a borrowing spree. Power and roads were the flavour of the season, and a number of business groups bid for projects and liberally took on leverage. But there were others as well. Telecom companies bid frenetically for licences and spectrum, and borrowed heavily in order to pay for these. Aviation firms were also borrowing heavily as were firms in metals, minerals and other sectors.
The problem was that quite a few businessmen had not planned for things going wrong in their sectors. To be fair, the problems of the last few years of the UPA-II government were difficult to anticipate. The policy paralysis, the fuel-linkage problems for power firms, the issues with land acquisition - all hit infrastructure projects. But while these were external factors, many companies got into trouble because of overambitious projections or bad decisions. Too many hotel companies ran up losses as they had expanded faster than they could service their debts. Companies like Kingfisher went bust because of wrong business decisions.
The result of all this is that stressed assets of banks are rising, while many companies have been selling off their assets to try and reduce their interest payouts. But getting the corporate debt situation under control will take time. It may slow down the economic recovery because there are too many borrowers in the market looking to sell off assets to cash-rich companies. If cash-rich companies buy these built-up-but-distressed assets instead of investing in fresh projects, the investment cycle may get delayed. And any delay in the investment cycle does not augur well for the government.
In our cover story this issue, Managing Editor Rajeev Dubey looks at the debt problem in detail. But all the news on the debt front is not bad, he points out. There are also quite a few companies that have been extremely prudent in their borrowing. And these are the ones poised to take most advantage of the current situation.