India Inc’s loan mess needs immediate government attention

At a time when the government is desperately trying to revive the Indian economy by spending heavily on infrastructure, some of the companies that ought to have benefitted from the government’s spending spree are probably facing huge working capital crisis.

Saddled with unprecedented debt, most of these companies — Lanco, Jaypee Group, GMR, GVK Group, Essar, Adani, Reliance Group, JSW Group and Vedanta Group — in the infrastructure sector are today finding themselves in a vicious cycle, where they need more debt to even run their daily operations!

The situation has come to such a pass that the companies’ interest cost has become bigger than their gross profit. This has resulted in companies defaulting on loan repayments leading to sharp rise in non-performing assets (NPAs) of banks. At the end of September, impaired assets (NPAs plus restructured loans) accounted for almost 13 per cent of the total advances.

Take, for instance, Lanco Infratech. For the past two financial years, its operating profits (Rs 176 crore in 2014-15, and Rs 215 crore in 2013-14) is less than its interest costs (Rs 772 and Rs 628 in the same order). The company had a total debt of Rs 6,600 crore at the end of 2014-15. In the same year, the company’s revenue was only Rs 1,400 crore, its debt-equity ratio — which calculates how many times the shareholder’s equity is the company’s total debt — was 3.25 times.

A debt-equity ratio of over two is usually a sign of not-so-good financials of a company.

Lanco Infratech is not an isolated case; when you sift through reams of data and pages of annual reports of companies, you would realise the rot has set in deep and unsustainable levels of debt has assumed the proportion of an epidemic.

The total debt of BSE 500 companies at the end of March 2015 was close to Rs 46 lakh crore, up 50 per cent from Rs 30 lakh crore in March 2012. During the same period, the interest cost of the companies has gone up from Rs 5 lakh crore, to Rs 8 lakh crore — an increase of almost 60 per cent. Not that rising debt always points to a crisis — higher debt is also a sign of higher capital expenditure by companies.

But the real cause of concern is that such high growth in debt is in spite of slow or no pick-up in capex activities in the past three years. In fact, many research firms have predicted a 10-15 per cent decline in private sector capex during the current financial year.

WHAT LED TO THIS MESS?

Blame it on the excesses of capitalism. In market economies, bubbles do get created when times are good, and individuals and institutions fall for the vice called indiscretion. In the past decade, between 2004 and 2008, India saw a period of super growth.

There was huge wealth creation — both for the companies and individuals. Many domestic companies sitting on huge cash piles got carried away by the success they had tasted and became more ambitious. They set out to expand globally, and went on a buying spree. Companies such as the Tatas, Birlas, Airtels, Vedantas and even the smaller ones such as the Crompton Greaves, and Suzlons bought companies in Europe, Africa and other parts of the world.

They took huge loans to make these acquisitions. For instance, the Tata Group took a loan of around $7-7.5 billion to finance its purchase of Corus.

However, soon after some of these acquisitions, recession hit badly the economies in Europe and North America — continents where most of these acquired companies operated. The recession lasted for a much longer period than it was earlier expected. Soon, these acquisitions started bleeding and the Indian companies that bought them by paying hefty prices found themselves neck-deep in debt.

Some companies also suffered because of stalled projects due to delay in environmental clearances, land acquisition, and other regulatory issues. These delays led to huge cost-overruns, which in turn led to mounting debt for companies involved in these projects.

Some of the mess is also due to falling demand for metals and capital goods due to global recession followed by slowdown in China.

Whatever may have led to this mess, it has become one of the most pressing issue for the government trying hard to kick-start the capex cycle.

Companies are laden with huge debts, and banks are facing a precarious situation where over Rs 7 lakh crore worth of loan assets are seen going to drains. What role can the government play to help both the economy as well as the companies to get out of the turmoil?

Spend heavily on infrastructure: It can continue to invest in the infrastructure by taking loans from public or overseas institutions. Bring in foreign companies to complete the projects. Let the work start first, and let the domestic companies gain from the trickle-down effect, if they themselves are not in a position to undertake huge projects given the working capital issues they face

Recapitalise PSU banks: Public sector banks are worst affected due to increasing the poor asset quality. The government needs to infuse more capital into them so as to keep them from falling prey to corporate default.

Bring the bankruptcy code: Bankruptcy law would help expedite the insolvency process allowing banks and other lenders to attach and sell defaulters’ property to recover their debt. Bankruptcy law would shift the balance in the favour of lenders, which is today unfairly tilted in the favour of borrowers.

Keep the reform process going: The government can help corporate houses by cutting through the red tape, reforming tax laws and auto-piloting the economy. Of course, the path ahead is little rocky, but if the government can maintain the pace of reform process, it would be a big favour for businesses at large.