After India dodged the worst of the financial crisis a decade ago,a flurry of investment was made on over-optimistic assumptions.Banks have been in denial about the ability of some of their near-bankrupt borrowers to repay them.The result is that the balance-sheet of both banks and much of the corporte sector are in dangerous states.
TECHNICALLY, a person or company is said to be bankrupt when they are unable to repay debts owed. Another word for it is insolvency. By this definition, a huge chunk of the Indian corporate sector is bankrupt.
A lot of these companies are not merely in a situation of cash flow insolvency, meaning they are unable to service debts, but are also balance sheet insolvent, meaning their liabilities have exceeded their assets and they cannot raise enough funds even by selling everything they own.
This is a major reason why banks reeling under a huge burden of nonperforming debts are frozen in inaction. Some are continuing to lend to defaulting debtors in the hope that they will turn around. Not much is improving; the mass of so called non-performing assets of banks is only growing. As a consequence, the level of bad loans has risen to a 14-year high.
The unfortunate case of liquor baron Vijay Mallya, who fled the country, after accumulating a mountain of bank debt he apparently had no intention of repaying is just one example of how bad things are in the corporate sector.
Mallya is not the only Indian business tycoon who borrowed recklessly and spent recklessly during the previous United Progressive Alliance (UPA) rule when banking norms were thrown to the winds and crony capitalism was the order of the day.
Large and political influential business houses in India in that period went on an acquisition spree, picking up real estate, infrastructure projects, mines, hotels and whatever other assets that were up for sale. This buying frenzy was fueled by lax and often corrupt bankers who were not accountable to anyone other than their dodgy political bosses.
According to the International Monetary Fund (IMF), while global financial health continues to improve, the Indian corporate sector will see the greatest deterioration in its balance sheets.
In its April 2017 Global Financial Stability Report, the IMF has pointed out: “Although the profitability of banks in emerging market economies is generally strong—in particular compared with that in the United States and Europe - heavy credit losses continue to erode profits at many banks, notably in Russia and India.”
According to a CARE rating study, the Indian corporate sector’s non-performing assets in December 2016 amounted to ₹697409 crores out of which ₹614872 crores is attributed to PSUs. This is the reason why banks’ functioning is so constrained today.
The Reserve Bank of India (RBI) too paints a bleak picture of the state of the country’s banking sector. In its December 2016 Financial Stability Report, the RBI stated: “Theassetqualityofbanksdeteriorated further. The gross non-performing advances (GNPAs) ratio of SCBs increased to 9.1 per cent from 7.8 per cent betweenMarchandSeptember2016,pushing the overall stressed advances ratio to 12.3 per cent from11.5 percent(Chart2.2).Given the higher levels of impairment, SCBs may remain risk averse in the near future as they clean up their balance sheets and their capital position may remainin sufficient to support higher credit growth.”
An AFP report quoted Rajeswari Sengupta, an economist in Mumbai, saying that banks “are so stretched that they're not even lending to healthy companies, holding back growth…That’s a very big collateral damage... The biggest fallout is the lack of private sector investment — banks are stressed, private sectors are stressed, lending to corporates by banks has totally stalled.”Not surprisingly, credit growth has plummeted to 5 percent from almost 25 percent in 2010.
Mallya might have a point when he says he is a victim of a witch hunt and that there are bigger defaulters than him, none of whom are been tried for fraud.
Not surprisingly, hundreds of thousands of homebuyers in India have been thronging the courts to force large corporate builders to complete and handover homes they have already paid for. Despite clear evidence of fund diversion and non-completion of housing projects, large corporate builders have been able to get away with impunity
Chief among them is a group that had developed a Formula 1 racing track and picked up a slew of companies during the last one decade. It was one of the biggest corporate borrowers and now is sliding into bankruptcy.
The top ten business houses in the country have borrowed the most collectively owe more than 7.5 trillion rupees. Most of these companies are edging towards insolvency.
The RBI is its latest Financial Stability Report admitted that the “asset quality of large borrowers [have] deteriorated significantly. The share of special mention accounts (SMA)-2 increased across bankgroups.”
Everyone in the financial sector knows how bad things are. They however continue to pretend everything will fall into place. However, as the IMF has observed, the “link between the financial performance of the banking and corporate sectors in India is strong. With the corporate sector accounting for about 40percent of banks’ (particularly PSBs’) credit portfolios, PSB’s soundness and their ability to provide effective intermediation in the economy rest on effective debt restructuring and deleveraging in the corporate sector.”
The Fund however admitted that there was marginal improvement in the Indian corporate scene of late: “Corporate vulnerabilities subsided in FY2015/16 on concerted policy efforts to address structural bottlenecks, including delays in environmental clearances and land acquisition permits. Debt-at-risk—the share of debt held by firms with weak debtrepayment capacity (interest coverage ratio below one)—declined to 16.6 percent from 20.2 percent a year earlier, pointing to improved debt-repayment capacity.
However, the high debt-at-risk and NPAs in some sectors—as high as 36 percent in metals and mining—pose NPA slippage risks for banks.”
The RBI and the finance ministry has been issuing statements from time to time about fixing this huge problem; banks had been told to clean up their books by March 2017 and so on. A handful of senior bankers have been arrested. The finance ministry keep exhorting banks to shape up. But little has actually changed on the ground.
According to Credit Suisse’s Ashish Gupta, there are no signs of affected companies regaining their financial health: “To the contrary, the stress on corporates and banks is continuing to intensify, and this in turn is taking a measurable toll on investment and credit.”