Why smaller companies have bigger debts

A Mint analysis of 305 listed non-financial companies shows it is the smaller firms that are saddled with the highest amount of debt relative to their market capitalization


A large borrower is defined as a borrower who has aggregate exposure of Rs50 million and above. Photo: Mint
A large borrower is defined as a borrower who has aggregate exposure of Rs50 million and above. Photo: Mint

Sitaram Yechury, Member of Parliament and general secretary of the Communist Party of India (Marxist), wrote a letter to Prime Minister Narendra Modi last month, urging the government to name and shame the top 100 defaulters, responsible for saddling the nation’s banks with a huge pile of bad debt. The letter also alleged that while the debt of big corporations and borrowers have often been waived (or written down), “the farmers continue to be hounded for repayment of minor amounts in drought years”.

It is not without reason that most discussions over Indian banks’ bad debt woes inadvertently end up blaming the big, bloated Indian corporations for the mess, while simultaneously bringing up the issues of crony capitalism and corruption. The Reserve Bank of India had noted in its bi-annual Financial Stability Report, released in June that 86% of banks’ bad loans were taken by “large” borrowers, who accounted for 58% of total loans. A large borrower is defined as a borrower who has aggregate exposure of Rs50 million and above. And the top 10 conglomerate groups do account for a significant chunk of bank borrowings in the country, as the first part of this series pointed out.

However, it will be wrong to presume that India’s excessive debt problem is limited to the very large firms. A Mint analysis of 305 listed non-financial companies shows it is actually the smaller companies that are saddled with the highest amount of debt relative to their market capitalization. These 305 companies are those non-financial firms belonging to the BSE-500 universe for which past data is available. The BSE-500 index accounts for over 90% of market capitalization on the bourse.

The average debt of the bottom quartile of companies, ranked by their market capitalization, is around 2.3 times their market capitalization. On the other hand, the average debt burden of the top quartile of companies amounts to less than one-third of their market capitalization. The trends are roughly similar when we compare the debt to equity ratios of the 305 listed non-financial companies. Debt-equity ratios for the smallest firms in the BSE-500 universe are significantly higher than that for the biggest firms.

The smaller companies have witnessed the fastest debt pile-up in the last 10 years. Moreover, the ability of these smaller companies to meet their interest expense is also the worst compared to the rest.

The ability to meet interest expenses is at a 10-year low for both the top and bottom quartiles but the bottom quartile fares worse. The interest coverage ratio for the bottom quartile has slipped below one in FY16 for the sample under consideration. This means that they don’t earn enough in operating income to meet their interest expense. The decline in inflation is partly responsible for the fall in the interest coverage ratio over the past couple of years but the fall also reflects an inability to grow revenues substantially. The median firm in the top quartile earned Rs14,217 crore in net sales over the past fiscal year while the median firm in the bottom quartile earned Rs1,658 crore in net sales over the same period.

As a Mint column by Ravi Krishnan had pointed out earlier, smaller firms tend to be affected more when businesses are struggling to grow. Given their high leverage ratios the first domino to fall in a high-stress environment could well be a small-cap firm.

This is the second part of a four-part data journalism series on corporate debt in the country. The first part looked at asset sales of firms.

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