Where will India Inc find the money? PDF Print E-mail
Thursday, 06 February 2020 12:24
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Shobhana column

Finance minister Nirmala Sitharaman is exhorting India Inc to invest. That is a tall ask at a time when there is a shortage of liquidity, and demand. Since the government is short of cash, it is not repaying its dues, corporate cash-flows are crimped, not all banks have enough capital at a time when the NPA cycle hasn’t ended, and several large NBFCs are insolvent. If 2020 is to be a turnround year for the Indian economy, the money multiplier must be put to work.

But, the government’s revenue collections are optimistic—and overstated by about Rs1 lakh crore for FY20—and unless Vivad se Vishwas works, the shortfall will remain. Most banks remain unwilling to lend, despite having the capital or resources to do so, because the quality of corporate borrowers is poor, and also because demand for credit is muted. In Q3FY20, large lenders like State Bank of India and PNB have have seen virtually no increase in their corporate loan books; some have reported a contraction. So, they are lending to individual or retail borrowers and are happy to park some Rs3.5 lakh crore with RBI.

To be sure, there is a clutch of strong NBFC lenders reaching out to customers not tapped by banks, and it is possible they will have enough liquidity to lend; the question is whether they will find enough good borrowers so as to protect their balance-sheets. Also, Crisil, on Tuesday, put out a study that said loan losses at NBFCs and HFCs could rise by 30-150 bps by March 2020, depending on the asset class; this on the back of a 20-150 bps increase in H1FY20. What’s worrying, the agency points out, is that even the relatively safer asset classes—retail loans for homes and cars—which account for over half of the NBFCs assets, are seeing a deterioration, so challenging is the economic environment. Bigger loan losses—whether at banks or NBFCs—will not only erode their capital, it will make lenders more risk-averse. The even bigger concern, as Crisil has observed, is that slippages in the wholesale loan book are expected to be significant, especially when the books come out of moratorium. NPAs, Crisil believes, could jump because the slowdown is hurting the businesses. Already, NPAs in the real estate segment are estimated to have increased to 3.3% in September 30, 2019, from 1.8% in March 2019. One might argue that real estate and structured credit comprised just 16% of the assets of non-banks in March 2019. But, that is a good Rs3.8 lakh crore, and while it isn’t that all of this may go bad, even a 25% slip would be enough to aggravate the liquidity stress.

There are many who say India will get more than its fair share of foreign flows in 2020, and that foreign portfolio investors (FPIs) will put in big sums into India’s stock and bond markets. They may, but again, they will buy only into the best companies as they have done in the last couple of years. The Sensex may have posted big gains, but 80% of the stock market has lost value. That trend will not change simply because smaller companies are unlikely to post strong earnings until the economy is on a much firmer footing. The government may be able to attract foreign funds, but rather than borrowing on its balance sheet, it may be better to attract project-specific funding. Net household financial savings are falling as a share of GDP, and are a cause for concern.

But, cash-flows at most companies today are crimped; they are eking out profits, largely by cutting costs. A look at the Q3FY20 corporate results shows how revenues are barely rising; for a sample of nearly 460 companies, these have stayed flat year-on-year. It is because costs have been reined in, thanks to benign commodity prices, that operating profits have gone up. The bottom line, in many cases, has been hugely bumped up by the lower tax rate, but those like Bharti Airtel have reported a loss; at JSW Steel, profits crashed 80%.

There are no signs India Inc will invest for at least another two years. First, promoters don’t have too much spare cash to put in as equity capital. This was never a problem in the past because, more often than not, the promoter’s equity contribution came from the total project cost—or by diverting the cash flows of another venture meant to repay loans. That might be hard to do today. Those that were able to borrow, did so, and picked up assets in the M&A market or via the IBC.

The short point is that the debt profile for India Inc isn’t improving quickly and may even deteriorate even if the ratings agencies don’t want us to know. Right now, few companies have the wherewithal to leverage. In any case, there is no hurry because capacity utilisation collapsed to 69% in September from 73.6 in June, according to RBI’s OBICUS survey. And, there is little hope consumption will pick up anytime soon since capex has stagnated for at least three years and few new jobs have been created. On the contrary, with companies such as Jet Airways folding up, jobs have been lost.


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