Slowdown blues: Low demand in economy shrinks loan book of India Inc

Outstanding loans to commercial sector fell Rs 65K cr; in H1FY19, it grew Rs 1.73 trn

Lack of aggregate demand in the economy has begun to weigh on fresh borrowings by the corporate sector as well as smaller businesses. According to the latest monetary policy review, flow of resources to the commercial territory was negative in the first half (April-September or H1) of 2019-20 (FY20).

This is the first time in several years that companies and businesses are repaying debt and deleveraging their balance sheets at the aggregate level rather than expand borrowings to make fresh investments. In H1FY20, outstanding loans to the commercial sector was down Rs 65,000 crore, over the same period last year. In H1 of 2018-19, it rose Rs 1.73 trillion, in line with faster growth of corporate revenues.

“The data is not surprising. I have spoken to dozens of entrepreneurs across sectors and no manufacturing company is doing capex or planning expansion. So there is little demand for corporate loan in the system right now,” said Samir Lodha, chief executive officer of QuantArt, a Mumbai-based corporate treasury advisory firm.

He added that this hinted at a lack of demand in the economy and the latest rate cut of 25 basis points by the Reserve Bank of India (RBI) on Friday would do little to change the situation.

If entrepreneurs don’t foresee greater demand in the future they will not borrow, even if there is surplus liquidity,” he added.

Other experts said the latest contraction follow the trend of a decline in borrowings by non-financial firms in recent years.

“Borrowings by non-financial companies have been on a downward trajectory for over three years now. The squeeze in borrowings started with the public sector banks' asset quality review by Reserve Bank of India way back in 2016 and the trend worsened after demonetisation,” said Dhananjay Sinha, head economist at IDFC Securities.

Total incremental borrowing by the country’s top listed non-financial companies from FY14 to FY18 was down 56 per cent compared to the previous five-year period. Companies cumulatively borrowed Rs 5.32 trillion in this period compared to Rs 12.2 trillion in the previous five-year period and Rs 6.4 trillion between FY04 and FY09.

 

The analysis is based on audited financials of the country’s 704 top non-financial listed companies that are either part of BSE500, BSE MidCap or BSE SmallCap index. The numbers have been adjusted for their listed non-banking finance subsidiaries.

Corporate financials suggest decline in borrowings has been much sharper in general manufacturing and non-financial service sectors. The incremental borrowings by the non-financial sector, excluding telecom operators and Reliance Industries, was in the negative territory for two consecutive years — FY16 and FY17. It recovered in FY18, and declined in FY19.

Telecom companies including Reliance Jio have borrowed heavily in recent years, either to pay for 4G airwaves or offset losses.

Analysts said a decline in borrowings by companies themselves creates a demand problem in the economy, especially for investment-related items such as capital goods, metals, power, cement, and commercial vehicle among others.

“Decline in credit by corporate entities is already visible in the gross domestic product data. There has been a sharp decline in private consumption demand, following sluggish growth in domestic capital formation or investment in the past,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services. 

This, in turns, has created a problem where corporate entities cannot borrow more unless there is greater demand. But demand will not be created unless corporate entities start to grow and expand, putting more money in the hands of their workers and suppliers.