Column : Of debt and distress

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SummaryReliance Communications will make a piffling R500 crore as profits this year, after forking out more than four times the amount by way of interest.

Banks were not careful about companies becoming highly leveraged

Reliance Communications will make a piffling R500 crore as profits this year, after forking out more than four times the amount by way of interest. So highly leveraged has the telco become with borrowings of roughly R35,000 crore that its net debt to trailing 12 months-ebitda is now a staggering six times. RCom’s not the only one, almost all of India’s infra players are leveraged to the hilt—whether it’s a GVK, the Adani Group or a Lanco Infra. And given the way the economy’s going, it looks like they’re going to stay that way for a while. That would not worry them too much; Indian corporate history is littered with instances of banks taking hits and haircuts—promoters here are rarely out of pocket.

The numbers coming out of the corporate debt restructuring (CDR) cell show it’s no different this time around—between April and September, bankers agreed to recast loans worth R50,000 crore—which means they’ve sort of ever-greened the loans by easing the repayment terms for the promoters who, for their part, will bring in a fraction of the net present value of the hit that banks will take. By the look of things, the situation will worsen before 2012-13 is out.

Indeed, that companies were way too indebted has been clear for many months now; in an assessment made earlier this year, Credit Suisse observed that the total debt of 10 business groups had jumped five-fold in five years, and at around R5.5 lakh crore, accounted for a frightening 98% of the banking system’s net worth. Evidently, bankers had not foreseen the sharp turn in the economic cycle would crimp cash flows to this extent nor that the policy paralysis in government that would stall projects, starve power plants of gas and coal, and steel mills of iron ore.

The Reserve Bank of India (RBI), too, had not thought it necessary to turn cautious, else the central bank could have pruned banks’ prudential loan limits—the maximum amounts that they can lend to a company and a group as a share of their net worth—from the very generous levels of 15% and 40%, respectively. Although RBI has realised that banks are not setting aside enough capital to take care of potentially toxic assets and the fact that promoters have got away with too small a sacrifice in the restructuring packages—the observations of a panel set up

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