Column : In crisis, wear your balance sheet

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: What is the likely impact of the global liquidity squeeze on Indian companies? Indian companies do not rely too much on equity markets or even on banks. They have relied largely on internal accruals and on sundry creditors for financing their working capital and capital expenditure.

The problem is that internal accruals have been falling because of high costs. Excellent growth in sales this year is not matched by growth in profits. In the first half of 2008-09, listed companies saw their sales grow by 33 per cent. But, they saw their profits plummet by 44 per cent. A large part of the fall is because of the fall in profits of petroleum refining companies. But, even the non-refining manufacturing companies saw their profits suffer. The fall in overall profits has contributed to the strain on the Indian banking system. Companies that relied largely upon internal accruals now do not have such levels of accruals to fall back upon. They are thus forced to turn to banks. With good balance sheets banks should be happy to lend to them. But, banks themselves have been drained out because of an unusual spike in demand for credit.

The global liquidity crisis has hit enterprises that are engaged in international trade. Perceptions of counter-party risks in international trade have worsened, because of the global financial turmoil. As a result, an importer in India faces a difficult business environment since international suppliers refuse to provide credit like they did till just a few weeks ago. This apparently, has led to companies drawing upon resources from the Indian banking system.