As India Inc struggles to cut down debt, the economy suffers

GVK Power & Infrastructure

13/09/2017 04:50

By Devidutta Tripathy and Suvashree Choudhury 
    MUMBAI, Sept 13 (Reuters) - India's cash crunch and 
confusion over the introduction of a national sales tax were 
initially blamed for pulling economic growth down to its weakest 
pace in more than three years. But that is masking a more 
debilitating factor affecting the economy - corporate debt. 
    Thomson Reuters data, based on the latest annual earnings 
reports, shows India's corporate debt rose to a seven-year high 
at the end of March. More than a fifth of large companies did 
not earn enough to pay interest on their loans and the pace of 
new loans fell to the lowest in more than six decades. 
    The Indian government reported on Aug 31 that annual GDP 
growth in the quarter ended June dropped to 5.7 percent, an 
envious pace for many countries but India's weakest since early 
2014. 
    It was blamed on attempts by the government to flush out 
money hidden from the tax man, which caused a cash crunch, and 
the introduction of a general sales tax (GST), which prompted 
businesses and consumers to hit the pause button.  urn:newsml:reuters.com:*:nL4N1LH4QT 
    But Indian business executives say they are more concerned 
about the impact of soured loans on bank balance sheets, which 
prevent them from getting the full benefit of central bank rate 
cuts. That is sapping India's economic vitality, they say. 
    Since January 2015, the central bank has cut policy rates 
 INREPO=ECI  by 200 basis points, or 2 percentage points, but 
commercial bank benchmark lending rates have come down less, by 
about 120 basis points. 
    "Interest rates are still very high," said A. Issac George, 
chief financial officer of GVK Power & Infrastructure Ltd 
 GVKP.NS . He said his firm's borrowing costs have remained 
unchanged at about 11 percent. 
    That makes it tougher for the conglomerate to lower its net 
debt of around 179 billion rupees ($2.80 billion). 
    GVK's earnings covered just half of its debt servicing 
costs, Credit Suisse data shows, below the 1 percent threshhold 
typically seen as a bare minimum. 
    "We are not in a position to take a decision on whether we 
should expand our business or set up new businesses," said 
George. GVK is not alone in trying to manage high debts. 
    Thomson Reuters data shows net debt for 288 companies with a 
market capitalisation of more than $500 million, covering most 
big firms in India, has hit at least a seven-year high of 18 
trillion rupees ($281 billion). Soured debt was 12 percent of 
total loans held by lenders at the end of March. 
    Another Thomson Reuters analysis showed more than a fifth of 
513 Indian companies had interest cover of less than 1 percent. 
    New loans are also hard to come by: RBI data shows bank 
credit growth fell by a quarterly record in April-June. On an 
annual basis, the pace of new loans in the year to the end of 
March, fell to the lowest since the fiscal year ended in March 
1954. 
    The impact can be seen in the GDP data. Gross capital 
formation, a gauge of private investment, fell to less than 30 
percent of GDP in the June quarter, from 31 percent a year 
earlier and 38 percent a decade ago. 
     
    SEEKING ANSWERS 
    The Reserve Bank of India (RBI), the central bank, has been 
reluctant to cut rates too aggressively because of concerns 
about consumer inflation  INCPIY=ECI . 
    "It is only after lending rates come down that demand will 
revive to exhaust capacity and spark off investment," Bank of 
America Merrill Lynch said in a note to clients. 
    RBI officials though see the issue as a banking one, and 
want the government to inject more funds into state-run lenders. 
Indian banks needed "substantial additional capital" from the 
government, RBI Deputy Governor Viral Acharya said.  urn:newsml:reuters.com:*:nL4N1LO4FY 
    Fitch Ratings said on Tuesday that Indian banks were likely 
to need about $65 billion in additional capital, 95 percent of 
it for state-run lenders, by March 2019, far above the $11 
billion budgeted by the government.  urn:newsml:reuters.com:*:nL4N1LT1UV 
    The government says it stands behind the banks, but has yet 
to commit additional capital. It is pushing instead for measures 
to grant the RBI more power to steer companies through 
bankruptcy, a process analysts say could take years. 
    The government has other options: former RBI Governor 
Raghuram Rajan, for example, proposed in a Reuters interview 
that New Delhi sell stakes in state-owned companies to fund a 
bank recapitalisation.  urn:newsml:reuters.com:*:nL2N1LO0Q9 
    "We would always want to see lower rates, but I don't see 
too much of a scope now to go below where we are today," said 
Kumar Mangalam Birla, chairman of the metals-to-telecoms 
conglomerate, Aditya Birla. 
    "At the end of the day if you have resolution to the NPA 
(non-performing asset) problem, that will create more space for 
the banks to start lending again." 
 
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Asia Pacific economic snapshot    http://tmsnrt.rs/2p39zn5  
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 (Reporting by Devidutta Tripathy and Suvashree Dey Choudhury: 
Additional Reporting by Gaurav Dogra in Bengaluru: Editing by 
Rafael Nam and Neil Fullick) 
 ((devidutta.tripathy@thomsonreuters.com; +91 84518 40430; 
Reuters Messaging: 
devidutta.tripathy.thomsonreuters.com@reuters.net)) 
 
Keywords: INDIA ECONOMY/LENDINGRATES