New Delhi: The profitability of Indian companies will be dented over the next six months by the economic downturn, K.V. Kamath, ICICI Bank Ltd chief executive officer, has warned, but has held out hope of a recovery in the second half of 2009.
“There is pain for another two quarters but I see an environment full of opportunity thereafter,” Kamath, who is also president of the Confederation of Indian Industry, said in a phone interview.
“The most painful thing for corporate India in the next few months would be to take profit impact due to loss of inventory valuation,” he said, explaining that this was a consequence of commodity prices more than halving in a matter of weeks when the economic meltdown set in. The warning coincides with a 22% dip in advance tax collection in December and precedes the announcement of quarterly financial results by companies this month.
No relief: ICICI Bank Ltd chief executive officer K.V. Kamath. Indranil Mukherjee / AFP
Economic growth slowed to 7.6% in the fiscal second quarter from 9.3% a year earlier as a credit crunch and high borrowing costs squeezed companies and consumers.
Kamath said companies face a tough task in managing long-term finance in the face of sliding interest rates. In an attempt to ease credit and spur slowing economic growth, the Reserve Bank of India (RBI) has slashed interest rates and reduced the portion of deposits that banks are required to keep with the central bank.
Asked if Indian companies should forget global takeovers, given the reported funding problems faced byTata Motors Ltd over its acquisition of the Jaguar and Land Rover brands from Ford Motor Co., Kamath said: “I think India Inc. should use the time to basically to do detailing and other work on projects they are looking at.”
Kamath further said, “Their appetite for acquisition I don’t think needs to be calibrated, but their funding as option certainly would need to be calibrated... I will not talk of Tatas per se... The sad fact is dollars are not available to anybody.”
Global banks are not lending to one another because of the risk of default, being content to park their funds in safe government securities.
Kamath said Indian companies would not want to see an economic slowdown prolonged in 2009 because that “will throw all plans out of gear.”
Noting that small and medium enterprises, or SMEs, are under particularly intense pressure, he said, “I would still think that SME sector would be the one under the most pressure. And whatever we can do to give them a helping hand through regulatory policy we should try and do that.”
He suggested that the bad-loan recognition norms for the sector could be relaxed by extending the number of days for counting defaults to 180 from 90. Loans on which no principal or interest has been paid for 90 days are now counted as non-performing assets.
“I think certainly something needs to be done for this sector,” Kamath said.
The government and RBI are trying to minimize the impact of the global slowdown on the country through fiscal and monetary measures. Industrial output growth halved in the fiscal first-half. The government is finalizing a second stimulus package to prop up economic growth.