No free lunches

Most of India’s biggest and most successful corporates are also among the most indebted, with a combined cumulative debt of Rs 6,31,024.70 crore

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Reuters

What does this list stand for? Reliance ADA Group, Vedanta Resources, Essar Group, Adani Group, Jaypee Group, JSW Group, GMR Group, Lanco Group, Videocon Group and GVK Group.

A list of India’s biggest, most successful, corporates? Going by the size of their balance-sheets, their market share in the sectors they operate in, the value of their stock in the markets, the kind of access they enjoy in the corridors of power and the clout they wield with the system, this would be a popular guess. This would also be a correct conclusion to reach on all the above factors.

But there is another, less talked about characteristic these companies share — they are also among the most indebted of Indian corporates, with a combined cumulative debt of Rs 6,31,024.70 crore — over $100 billion, according to a widely discussed research report by Credit Suisse.

REDLINING DEBT

The report offers some devastating insights into the kind of problems these companies — India’s biggest and supposedly brightest — face as a result of reckless borrowing.

“Debt levels at these groups have risen by 15 per cent year-on-year, even as profitability continues to be under pressure.

The largest increases have been at groups such as GVK, Lanco and ADA where the gross debt levels are up 24 per cent Y-o-Y. For most of these corporate groups, the debt increase even outpaced capex (capital expenditure)”, the report pointed out.

The Credit Suisse report also brought out some worrying developments. Almost half (23 of 50) of the top 50 companies, by size of their debt, couldn’t pay interest on their loans in seven or more quarters in the past two years. Thirty eight companies reported net losses. And with a handful of exceptions, their current earnings were not enough to meet even interest repayments, leave alone repay the capital. The result has been a dramatic surge in ‘restructuring’ of bad debts by banks, desperate to prevent their star assets from being declared as bad loans.

In the past two years alone, Indian banks — mostly government-owned banks, but also the large private sector banks and multinational banks — have ‘restructured’ over Rs 2 lakh crore of loans, which would have otherwise gone into default category.

While agriculture loans, loans to small and medium enterprises and politically directed loan waivers have been largely blamed for the troubles the banks are facing, the reality is different.

More than 70 per cent of the restructured loans are accounted for by loans to the private sector. And a dominant share of this is accounted for by the biggest players in the business.

STIMULUS TO BORROW

There is more bad news. With investments falling, and the domestic banking system unable to lend further — because a lot of its money is already locked up in previous bad loans — the demand for ‘stimulus’ packages grew shriller from India Inc.

An obliging government promptly provided this stimulus by way of allowing corporates to borrow yet more money abroad.

Estimates put the share of foreign currency denominated corporate debt at over $225 billion — and more than half of this is unhedged, which means that a depreciating rupee has already added around 12-15 per cent to this when the time comes for repayment.

This, the borrowers are clearly not in a position to do. This would mean that Indian lenders will have to take a haircut of monumental proportions, if the situation is to be prevented from deteriorating into the kind of systemic collapse one saw in some of the smaller Western nations after the 2008 meltdown.

The Government will eventually have to foot the bill for this, by way of further capital infusion into the weakened balance-sheets of the banks it owns. Between 2010-11 and 2013-14 (which still has three months to go), the UPA-II regime has forked out Rs 58,643 crore by way of additional capital infusion into state-owned banks. Add the special funds released during the crisis in 2009-10 and the total tops Rs 60,000 crore.

This is an enormous amount of money, money which could — and should — have been spent on creating tangible infrastructure, productive assets and in improving the quality of life of ordinary citizens. Instead, it is likely to vanish down the black hole of un-repayable corporate debt. That is because every rupee put into a bank’s capital base translates into Rs 10 of additional debt. Debt, which the numbers clearly show, the corporate sector is unlikely to pay back, unless lenders take more punishment.

STRESSED OUT

This is what has set the alarm bells ringing at the Reserve Bank of India, which has to deal with the mess in the case of a banking system collapse. In its Financial Stability Report released this week, it pointed out the reasons to worry.

For starters, the ‘stressed advances’ — bad loans to you and me — have shot up to 10.2 per cent of total loans as of September this year, up from the already high 9.2 per cent at the start of the financial year.

It also says the largest contribution to stressed advances come from public sector banks and that ‘medium and large’ industries contributed more towards this. Just five sectors — steel, textiles, aviation, mining and infrastructure — accounted for more than half the stressed assets of the banking system.

This concentration — and the widespread exposure across banks to various troubled borrowers, given exposure norms (a bank’s exposure to a single borrower can go up to 25 per cent of the bank’s total capital, while its group exposure limit can go up to 55 per cent of the bank’s total capital) — means that the collapse of even one large player could have a devastating impact on the system.

According to scenario analysis done by the RBI, the failure of a single large corporate group can end up wiping out half the capital of the entire banking system, when 60 per cent of the money is not recoverable.

The figure is higher if the loss default ratio is higher. If you think this scenario is unlikely, think Kingfisher or Deccan Chronicle — and then take a close look at the balance-sheets of India’s biggest corporates.

2013 was a great year for India Inc. A combination of slowing economic growth and a floundering and politically beleaguered government desperate to salvage its second stint in power meant that India Inc could occupy the moral high ground, lambasting the government for its ‘governance deficit’ and ‘policy logjam’, while not so discreetly bullying the administration — and by extension, government-owned banks — into extending yet more concessions and ever more loans without a murmur.

India Inc has been strident in its criticism of the Government’s ‘fiscal profligacy’ and panned the government’s social sector hand-outs as being counter-productive.

Turns out it is far more profligate than the government is — and gets far more dole than the poor ever did