Graphic by Santosh Sharma/Mint
Graphic by Santosh Sharma/Mint

The great Indian corporate deleveraging that slowed the economy

  • A big reason for not borrowing is the uncertainty over future revenues
  • The September quarter GDP (gross domestic product) growth data, due later this week, is likely to show further deceleration

When you are busy cleaning up clutter, seldom is there time to go shopping. This explains why bank credit has slumped— because Indian companies have been busy deleveraging their balance sheets.

Over the last five years, costly debt has been paid off and fresh borrowing eschewed.

Bank credit to private sector non-financial firms grew at a five-year-low pace of 9.3%, according to Motilal Oswal Financial Services Ltd. Since credit is what fuels growth, a slump in it is symptomatic of a slowdown.

The September quarter GDP (gross domestic product) growth data, due later this week, is likely to show further deceleration. Growth forecasts range from 4.2% to 4.5%.

If a credit slump indicates slowing growth, an upswing should logically boost output. The pickup in economic growth depends on how fast Indian companies are back in the market to borrow. For that, the deleveraging process should be in its last leg. But is it?

Despite the massive shedding of debt over the past five years, corporate debt is not far from what it was four years back. Motilal Oswal estimates that corporate debt was 46.8% of GDP as of September, not very different from 45.8% in September 2015.

The economic slowdown itself is making things difficult. “The ongoing slowdown will prolong the corporate balance sheet deleveraging cycle and the bank asset quality cycle," analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a 19 November report.

Another reason is that several large firms are still undergoing insolvency process and resolution is slow. To that extent, the debt is still on the balance sheets and banks have not got their cheques so far.

This means deleveraging is far from over. In fact, debt levels are likely to continue to fall if forecasts of bank loan growth are anything to go by.

For example, CLSA India Pvt. Ltd believes loan growth would be 10% for FY21.

Borrowings through the bond market are not encouraging either. Analysts at CLSA said in their note that bonds showed a growth of just 5% for the September quarter.

In short, India’s economic growth slowdown could stretch as its businessmen continue shedding their debt.

A big reason for not borrowing is the uncertainty over future revenues.

Indeed, from carmakers to windmill operators, firms have stayed away from debt as they are unsure of future demand. This comes full circle to the consumption slowdown that is under way. “We lower our GDP growth projections to 4.9% y-o-y (from 5.7%) in 2019 and to 6.0% (from 6.9%) in 2020. We now believe GDP growth did not bottom in Q2 and will likely slide further to 4.2% in Q3," said the Nomura report.

Close