The first quarter results that have come in so far paint a gloomy forecast for the year ahead. The 399 companies (excluding Reliance Industries and oil companies whose performance has been affected by decontrol) have shown an 18.5 per cent decline in net profit on an 5.7 per cent increase in sales. Corporate performance has been poor in the last three years, with a declining trend in sales and profits (see chart). That key stock indices are showing signs of nervousness points to the market factoring in the possibility of a recovery this year not materialising.
A first quarter 1998-99 review conducted by the associations council of the CII reveals that 53 per cent of industries have recorded low or negative growth. The fims covered under this review account for about 65 per cent of the industrial output. Realising that increasing top line growth is very difficult, corporates have been reducing overheads to make the bottomline look healthier. Keeping inventory and receivables at low levels, trimming workforce and improving productivity are becoming common place. However, the benefits of these exercises can be enjoyed on an extended basis only if turnover growth picks up. Interest costs had fallen in 1997-98 owing to a reduction in interest rates and debt restructuring. With forecasts of a firming up of interest rates in the second half, this cushion of comfort, too, may be taken away.
The Centre for Monitoring Indian Economy (CMIE) had earlier predicted a significant slowdown in industrial growth in 1998-99 to 4.5 per cent from 6.6 per cent in 1997-98. The major reasons include a substantial slowdown in domestic consumer demand and a slump in fresh investment spending (in 1997-98 fresh investment proposals had shown a 40 per cent dip).
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Higher imports are expected to stifle domestic output, and according to CMIE, the share of imports in the total domestic market for industrial goods is on the rise, which has a direct bearing on domestic industrial growth. If these forecasts are proven right, then one can expect an increased incidence of losses and, industrial sickness creeping in small and medium companies.
IT sector loans
It cannot be denied that flow of institutional credit to the information technology (IT) sector has been halting -- with relatively smaller, start-up operations suffering from want of financing. At the same time, any efforts at forcing banks to lend to this segment could turn out to be counter-productive. In the IT package being worked out, as a follow-up to the finance minister's budget promise, the Reserve Bank of India (RBI) is to set up working capital guidelines for bank lending to the IT sector.
Loans would be counted as priority sector lending for the next five years and be eligible for refinance. In doing so, the apex bank will be going back on its word on two counts. One, it is reverting to the earlier practice of prescribing working capital assessment norms, having freed the banking sector from it earlier. Two, it is resorting to sector-specific refinance. RBI had earlier stated that it was moving away from sector-specific refinancing to a general refinancing system.
Cheap refinance is akin to the central bank bearing the subsidy burden. This also blunts the RBI's leverage in working with cash reserve ratio as an effective monetary tool.
Indeed, the issue is availability of adequate funds and not of interest rates. As YV Reddy has pointed out at the national venture capital seminar, the reason why banks are reluctant to lend to this sector falls into four categories. One, there are no tangible assets which can be financed in the conventional manner. Two, the fixed assets depreciate very fast: hardware becomes obsolete quickly and banks find their collateral sinking. Third, success stories are few while the industry is flooded with failures.
Entry levels in the industry are low; all those who enter it do not necessarily turn into success stories.
Four, there are real risks associated with both the product under development and the manpower that is working on the product. A disturbance either way can mar a company's prospects. These factors are real and cannot be wished away. Thus, lending to the sector is more like venture capital where a bank takes a call on the sucess of the enterprise. Most Indian banks are ill-equipped to assess the finer details of such businesses and it is, therefore, unlikely that directed credit will fit the bill. Marking such credit as priority sector lending makes little difference given the widespread default in compliance with these norms. Banks are likely to end up thumbing their noses at the new package with no one being the wiser. At the end of it, the problems of an efficient credit delivery mechanism for the IT sector will remain.