BackThe messy path to deleveraging
Banks and companies are unwilling to address the problem of debt
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India’s equity market is scaling new peaks almost every day. The rally is largely driven by the anticipation that a new government will be able to engineer a quick turnaround in India’s economic fortunes after it takes charge in May.
The euphoria on Dalal Street belies the difficulty of reviving rapid growth. One of the key stumbling blocks to improve growth prospects is the high levels of corporate debt in India, especially in key sectors such as infrastructure and construction that are vital to reviving growth. Non-performing assets and restructured loans account for 12% of the total loans given by Indian banks, which is roughly equal the net worth of the banking sector. The ratio of short-term to total external debt, which scaled a peak of 43% at the end of fiscal year 2012-13, has fallen only by a percentage point to 42% in the first half of 2013-14, according to Reserve Bank of India (RBI) data. External commercial borrowings account for a large chunk of India’s overseas debt vulnerabilities. As the annual assessment of the economy by the International Monetary Fund pointed out earlier this year, the levels of corporate leverage are higher in India than most emerging markets.
To be sure, the sale of stressed assets has picked up in the past few months led by conglomerates such as the Videocon group and the Jaypee group. But such sales still account for a small fraction of the overall basket of stressed assets. As RBI governor Raghuram Rajan pointed out earlier this month, several corporations and banks are still unwilling to address the issue. Instead, they are lobbying the central bank to relax norms on recognition of bad loans to kick the can down the road.
Lobbying for regulatory forbearance is only one side of the story. Several large indebted companies, especially in the power and mining sectors, are now eyeing the cash pile of public sector enterprises. State-owned firms such as Coal India Ltd and NTPC Ltd are being seen as saviours, which will purchase the stressed assets of the indebted firms.
A section of the market is hoping a new government will expedite such deals to bailout private firms. Some of these assets may well be worth buying for the state-owned firms but other assets could simply be unviable. Unless this round of deal-making is above board, and is perceived to be so, it will only mark the making of the next big scam in India.
Even if a whiff of a scandal arises in the process of deleveraging, it will bring the economy back to the familiar days of policy paralysis once again. A spate of high-level corruption scandals has eroded the credibility of both political and business elites.
It is not a coincidence that both India’s domestic and external debt problems are concentrated in a handful of large politically connected conglomerates, operating in sectors such as mining, infrastructure and construction.
The pressure from New Delhi on state-owned banks to fund certain sectors and corporate groups played a key role in driving effervescent lending in the boom years.
The chickens have come home to roost now, and it is important that the promoters of stressed companies share the pain in the process of deleveraging to restore trust and credibility in India’s economic institutions.
Rajan recognizes the centrality of trust in this process. “Public confidence in banks and the perception about the legitimacy of things like recapitalizing banks has a lot to do with whether you think the money has gone in the right direction," said Rajan in his first interview to Mint after taking charge as central bank governor.
Ensuring that the resources of state-owned firms and banks are not abused in the process of deleveraging will be a key test for the new government. The sustainability of India’s economic recovery will hinge on whether India’s next prime minister shares Rajan’s sentiments on this issue.
Can Indian firms successfully deleverage? Tell us at views@livemint.com
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