Indian Corporate Debt: The Ticking Time Bomb

Is a humongous write off of 5.65 lakhs Crore staring at Indian banks?

Recently the RBI governor, Raghuram Rajan raised red flag on the condition of corporate debts amounting to INR 5.65 lakhs Crore! This figure constitutes 20% of the total corporate debts extended by banks to top 441 non-financial entities. The 67 companies that accounted for this large number which is well headed for a write–off are reportedly fighting insolvency and failing at it.
Worst is that the indicators of this fiasco were showing up for past five years and now it is too late to do much about it. The ROCE of these companies reduced to 7.4% in 2014-15 which is just a few basis points above the average interest cost which is presently 7.1%. These troubled companies have also slid below one on their interest coverage ratio basically putting a shroud on any hope of any debt recovery. Following trends on the NPA’s or non-performing assets on the banks’ balance sheets show as to how the picture had been shaping in the past years.

Note: The gap between the figure of 5.65 lakhs in 2014-15 and 2.63 lakhs in 2013-14 depicted in the graph above is mainly attributable to an increase of loss making entities from 49 last year to 67 this year. It may also indicate the non-provision for some of the corporate debts showing up now as non-serviceable.
Another worrisome trend that has been observed is that companies on an average spent about 34.2% of their profit in debt servicing thereby limiting investment in Capex and other infrastructure and development related expenditures. In an IMF working paper by Peter Lindner and Sung Eun Jung on Corporate vulnerabilities in India, it was revealed that Indian non-financial corporate sector is amongst the most leveraged in the world. The debt to equity ratio registered a growth of 43% over a period of 11 years to stand at 83% in 2012.
The companies that are already in financial lurch do not have an option of funding their operations from market and no fresh credit line might be introduced as the banks themselves are facing the heat of mounting debts. Besides, the track record of debt restructuring in India has been quite abysmal indicating the low efficacy of such measures as shown below.

Looks like banks would have to finally take the hit of bad loans and it comes at a time when India is all out creating a brand for itself which is pro-industry and pro-production. With finally investors’ confident restored and BSE looking above of 25K, is it time to absorb another shock?