How bad is India’s corporate debt problem?

India’s corporate debt-to-GDP ratio is lower than her peers, but the country fares worse when it comes to credit quality metrics


India’s corporate-debt-to-GDP ratio stood at 515 of GDP as of 31 March. Photo: Pradeep Gaur/Mint
India’s corporate-debt-to-GDP ratio stood at 515 of GDP as of 31 March. Photo: Pradeep Gaur/Mint

The earnings of the past couple of quarters seem to suggest that India’s burgeoning corporate debt problem is unlikely to end soon. But how bad is India’s corporate debt problem compared to its peers?

A cross-country analysis of corporate debt suggests that India’s total corporate debt relative to its gross domestic product (GDP) is less than that of several major economies. However, the quality of debt in India is far poorer, with a large fraction of indebted firms losing their repayment ability, and saddling banks with a rising pile of non-performing assets (NPAs).

Country comparison

As the chart below shows, overall corporate debt levels in India appear benign compared to other large economies of the world.

According to the Bank for International Settlements (BIS), India’s corporate debt-to-GDP ratio stood at 51% of GDP as of 31 March 2016. The size of India’s corporate debt, relative to GDP, is much lower than other major economies such as the US (72%) and the European Union (105%).

The China comparison

Also, compared with the bloated corporate debt levels of emerging-market peer China, which is facing an even bigger debt problem, India’s corporate debt burden appears much smaller.

Indian firms’ interest coverage ratio

However, the apparently benign credit aggregates for India hide unpleasant skeletons. While the size of India’s overall corporate debt is relatively low, the ability of Indian companies to meet interest expenses is among the lowest across emerging-market economies.

The depressed interest coverage ratio of Indian firms is primarily because of two key reasons: the slower revenue growth of indebted firms, and a relatively higher interest rate in India compared to most other economies.

Given the relatively high interest costs in India, many firms have often opted to raise money from abroad. The outstanding external commercial borrowings (ECBs) amounted to $177 billion at the end of June 2016—roughly 17% of total corporate debt outstanding. While ECBs allow companies to borrow cheaply, they also expose them to currency risk. In the absence of adequate hedging by corporations, this too could become a point of stress. Thus, while India’s corporate debt level is not significantly higher than that of its peers, the poor quality of debt and the low repayment ability of indebted firms continue to put an enormous strain on India’s economy and the banking system.

Bad loans: India vs other countries

As an earlier Plain Facts column pointed out, India’s NPA levels place it among the worst-performing major economies of the world.

While the bad loan ratio for some economies such as China’s may understate their debt problems, it is worth noting that even India’s bad loan ratio does not take into account all impaired assets.

The aggregate non-performing assets of the banking sector stood at Rs6.5 trillion, or 8.6% of loans, at the end of June 2016. Adding another 3.5% of restructured loans, total amount of “impaired” debt in the banking sector rises to 12.1%, according to a 19 September Credit Suisse research report. The report also warned that another 4.5%, or Rs3.3 trillion, of loans are still to be recognized as NPAs or restructured assets, suggesting that the actual ratio of impaired assets of India’s banking sector is over 16%.

India’s fragile corporate metrics and its bad loan problem are but the mirror images of each other. Till the corporate deleveraging cycle bottoms out, bank profitability and credit growth are unlikely to recover.

This is the third part of a four-part data journalism series on corporate debt in the country. The first part looked at the record asset sales of firms in 2016, and the second part examined the leverage levels of small-cap firms.

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