Here’s another reason why companies are complaining so loudly about the lack of funds: Internal funding sources have completely dried up.

Look at the the cash profit (profits after tax + depreciation) of 407 non-financial companies in BSE 500 in the last five quarters.

Also See: Drying Funds (Graphic)

Not only have net profits fallen sharply, but the depreciation charges too have come down from the levels they were at in the March quarter and now seem to have hit a plateau. The net effect: lower cash flow.

At a time when external sources of funds have dried up, equity funding is impossible to raise and bank credit is hard to get, the drying up of internal sources of funds is yet another negative factor affecting corporate liquidity. Reserve Bank of India data show that internal cash generation accounted for 29.6% of the total sources of funds to industry in 2007-08.

The numbers show that the year-on-year (y-o-y) rate of growth in cash profits has been steadily declining, except for a brief uptick in the June quarter.

In the September 2008 quarter, growth moved into negative territory, since the total cash profit for the September 2008 quarter, at Rs51,814.51 crore is well below that for the September 2007 quarter, at Rs66,166.16 crore.

Cash profits in the September quarter are also Rs12,781.4 crore lower than in the June quarter, while the depreciation charge was more or less the same amount. These numbers, however, are skewed because of the impact of the losses made by the oil companies.

If the oil companies are excluded from the sample, then, although the y-o-y rate of increase in cash generated continues to decline every quarter, growth was still a positive 8.76% in the September 2008 quarter. But this also shows how much oil companies have been contributing to the liquidity crunch, as their lack of cash generation forces them to borrow.

The silver lining is that, with oil prices coming down, they may not need to borrow so much in future, freeing up credit for use by other companies.