Corporate India living on borrowed time
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As the CDR cell grapples with increasing number of recast cases, it's apparent that banks need to take a lot of blame for the current mess they find themselves in
Corporate India is stressed. Not only are companies highly leveraged — because their revenues and profits are shrinking in a sluggish economy — their ability to service their borrowings is also falling. The manufacturing sector, in particular, seems to be in a spot; the ratio of earnings before interest and tax (Ebit) to the interest paid in 2011-12 fell to the lowest level in last eight years, according to the Reserve Bank of India (RBI) data.
With the economy having only gone downhill since March, cash flows have been under severe strain. Nowhere is this better reflected than in the numbers from the Corporate Debt Restructuring (CDR) cell; loans worth a whopping R52,000 crore have been referred to it between April and November this year, and that's after R50,000 crore of debt was recast in the first six months of the year.
While some of the mess is, without doubt, the result of a difficult business environment, some of the problem has been created by banks who lent somewhat recklessly during the boom years. An in-house analysis done by RBI of 12 holding companies (where accounts of all subsidiaries carrying out various projects of the corporate group are consolidated) belonging to eight large corporate groups with high exposure to infrastructure sector shows that eight out of the 12 companies saw borrowings increase by a compounded annual growth rate of over 30% between 2007-08 and 2011-12.
For all these 12 companies taken together, the interest coverage has gone down, whereas their debt-to-Ebitda and debt-to-equity ratios have gone up during the last four years. The RBI has highlighted the fact that these corporates seem to be more vulnerable compared to their counterparts in the same industry. The infrastructure sector, in particular, is very highly leveraged, at a time when many of its projects are stuck for want of clearances or are operating at lower than potential because of the scarcity of key inputs. Several power plants, for instance, don't have enough coal or gas to feed them.