BackIndian companies entangled in a debt trap
As India's growth slows, interest rates remain high and projects stall, corporate borrowers are finding it difficult to repay debt. A look at the implications
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Mumbai: On 8 October, the inside pages of two English-language newspapers carried a pair of identical public notices published by State Bank of India (SBI), the country’s largest lender.
The notices featured the photographs of two men identified as directors of five related companies, which had collectively borrowed around ₹ 740 crore (excluding interest) from the bank’s branch in Thane, Maharashtra. The notices said these Mumbai-based firms had defaulted on repayments.
The amount involved is the proverbial drop in the ocean, though significant for a single borrower. Still, the notices illustrated the desperation of banks weighed down by a mountain of bad loans as slowing economic growth, high interest rates and stalled projects force borrowers to default.
SBI is the first to adopt the practice—informally called naming and shaming—in the hope that defaulters feel embarrassed enough by the bad publicity (or deterred by the prospect of not getting future loans) to pay up.
“Sometimes it (the naming and shaming strategy) works, sometimes it doesn’t," said S.L. Bansal, chairman of state-run Oriental Bank of Commerce (OBC). “If the intention of the borrower is to defraud the system, then this tactic won’t work. But if the borrower has any concerns about his future banking needs, obviously he will pay up."
India’s banks have reason to stew about the pile-up of bad loans. The combined net debt (gross debt minus cash and bank balances) of India’s top 100 companies by market value (known as BSE 100 firms) rose 16.12% annually to triple to ₹ 10.24 trillion at the end of fiscal 2013 from ₹ 3.5 trillion in fiscal 2008.
These companies’ turnover, operating profit and net profit have all grown at a much slower clip than their debt over the last five years. Their operating profit to debt ratio fell to 0.42 in fiscal 2013 from 0.68 in fiscal 2008, showing the erosion of their ability to service debt with the profit generated from operations.
According to a Credit Suisse report released in August, the combined debt of 10 business groups—Adani Group, Essar Group, GMR Group, GVK group, Jaypee Group, JSW Group, Lanco Group, Anil Ambani’s Reliance Group, Vedanta group and Videocon Group—increased 15% year-on-year to touch ₹ 6.31 trillion in fiscal 2013.
The ability of heavily debt-ridden companies to service their interest costs has also dwindled. The interest coverage ratio for these 10 companies on average has fallen to 1.4 times in fiscal 2013, compared with 1.6 times in 2012. The ratio is used to determine how easily a company can pay interest on debt—the lower the ratio, the more it is burdened by debt.
Many companies’ loans are 40-70% foreign currency denominated; therefore, the rupee’s sharp depreciation is adding to their debt burden, the Credit Suisse report said.
With the 6.7% currency depreciation in the last fiscal, companies such as Reliance Communications Ltd (R-Com), Adani Enterprises Ltd and Jaiprakash Associates Ltd saw a forex hit equivalent to their fiscal 2013 profit after tax. With the rupee down 12% since March, the liabilities on account of this must have increased further, the report added.
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