Picture this. Between fiscal years 2010-11 and 2015-16, roughly five out of every 10 companies showed deterioration in their balance sheets, either through a pile-up of debt amid dwindling cash flows or buying assets that never had the potential to generate profits.
Given the debt binge, two out of every 10 firms are now in deep trouble and require several years to clear the debt overhang before they begin to show some improvement in their balance-sheet strength.
These are the conclusions arrived at by India Ratings through a study of balance sheets of the top 500 corporate borrowers that sit on a debt pile of Rs30.2 trillion and hold assets worth Rs57.2 trillion. Of the 500 companies, 234 firms are non-vulnerable as they have a competitive edge, enough cash flows and hold productive assets. So around Rs14 trillion worth of debt is safe.
About 85 companies holding Rs4 trillion worth of debt are highly unlikely to recover in the short term as they not only sit on a massive pile of debt that they cannot service but also have a large number of non-productive assets. These are the known bad apples and probably already figure as bad loans in banks’ books.
Twenty-six other companies that are not vulnerable, according to India Ratings, have weak asset quality, which means that it is a matter of time before they turn vulnerable—i.e., unless they stop raising debt. The only positive for these companies is their parentage, and a withdrawal of promoter support could drive them to the brink of default.
The common thread in these 111 companies is that over the last five fiscal years, they raised debt primarily to invest in related entities and financial assets. The aggregate investment in related parties by these companies shot up to 10% in FY16 from 3% in FY11.
That leaves us with 155 companies having Rs8.4 trillion worth of debt. These companies are weak mainly due to depressed demand and are expected to revive with economic recovery. And herein is the problem. The demonetization of high-value notes has hit demand across the economy and analysts expect at least two quarters to go until conditions normalize. These companies will soon find themselves in a tough spot.
For banks, of course, bad loans are waiting to pile up again.