While many imagined it was the ‘policy paralysis’ of the UPA that prevented India Inc from investing, as a report from Standard Chartered reiterates, most corporates are not in any position to take up large investments anymore. Which is why, even as the UPA cleared projects, and the NDA watered down environmental clearances to help, there hasn’t been too much of a pickup in investment activity. Certainly, the lack of clearances contributed to the problem in the sense that almost completed projects didn’t take off and this blocked valuable money; or in the absence of coal/gas, a completed power plant was unable to generate cash. At an aggregate level, as Standard Chartered points out, things are so bad, a fifth of the BSE 500 firms do not even have the EBIT to make good their interest obligations during the year—that has to be really bad news for banks. Indeed, India Inc’s debt pile-up has been so fast, it rose 10 times from FY02 to FY14—while debt rose 20% a year, net profits rose only 9%. With companies not raising equity even when equity markets were doing well, and as a result of profits slowing, the interest coverage ratio (ebit-to-interest) fell sharply from 7.4 in FY06-09 to 3.9 in FY14.
Fixing this isn’t going to be easy since, reducing the debt-equity ratio from the current 1.34 to a more manageable 1.2 requires firms to raise $80-90 billion. Faster clearances of projects, to that extent will help since, once the projects are unencumbered, firms will find it easier to sell them off which, in turn, will help them retire debt. This is especially true of the infrastructure sector that accounts for more than half the stressed debt. In the case of telecom, for instance, if the government quickly came out with liberal spectrum trading norms, several loss-making and stressed telcos would be in a position to sell their spectrum and retire debt. This is then both a challenge and an opportunity for banks. Certainly, more stressed loans are likely to turn into NPAs given how things are. If, however, they are able to force borrowers to sell off assets to retire debt, this could help rescue their balance sheets as well.