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“Beside the adverse impact on banks’ balance sheets, the high leverage (might mean) corporates may not be in a position to benefit from falling interest rates due to high levels of debt,“ said the report.
RBI has been laying emphasis on full monetary transmission after it reduced the repo rate (at which it lends to banks) by 75 basis points (bps) this year. However, banks have reduced their base rates (BRs) by only 25-30 bps. All loan rates are linked to the BR.
“While leverage has increased, the ability to repay debt (solvency ratio) and debt servicing ability (interest coverage ratio) of the corporates has declined,” added the report.
In fact, from a study by this newspaper, corporate India is currently more in debt than all state governments put together. In absolute terms, the gap in the liabilities of the Union government and corporate India was Rs 14.86 lakh crore in 2003-04 and was Rs 22.21 lakh crore in 2013-14.
A Moody’s report, issued last October, had also said the high leverage in the Indian corporate sector could prevent any meaningful recovery in asset quality at banks over the next 12-18 months.
With the slowing economy, companies are increasingly finding it difficult to meet loan commitments. Many infrastructure projects are stalled due to lack of environmental clearances, land acquisition issues and court cases. Many highly indebted companies were nudged by their banks to sell assets to repay loans. Recent examples are of the Jaypee Group, Avantha Group and Lanco.
A study by rating firm Ind Ra in March this year showed the aggregate debt of the 500 top borrowers was Rs 28,76,000 crore, about 73 per cent of total bank lending to the industry, services and export sectors. As many as 83 of these 500 largest borrowers have already been formally tagged as financially distressed. Within these 83, operating profitability barely covers the interest required to be serviced in most cases; there is also the absence of any strong parent.
These companies have limited expectation of an immediate improvement in profitability and these loans need to be restructured, with the banks taking a haircut. Many a time, even after restructuring of loans by banks, companies fail to make profits.
RBI recently came out with a strategic debt restructuring scheme for banks, giving them the power to take over assets of a defaulting company, if a loan recast fails to show results. This, analysts say, would accelerate mergers and acquisitions in the stressed project segments.
