Is Corporate Debt putting the brakes on India’s growth?

On 18th March 2016, Meghnad Desai Academy of Economics invited Mr. Madan Sabnavis, Chief Economist at CARE, to have a discussion with the Academy’s Associate Professor, Dr. Indradeep Ghosh, about how the rising corporate debt in our economy could affect India’s growth prospects. Mr. Madan began the talk by explaining the how corporate borrowing works in India, and remarked that corporate debt has caught the public eye because of the case of Vijay Malaya, who is just one of many such loan defaulters.

Corporate debt is linked to the building up of Non-Performing Assets (NPAs), Credit Default Swaps and affects the quality of assets in a company as well as the public sector banking system. A company usually raises money from three avenues:

1)     Banking System: This is the most preferred method of borrowing among companies.

2)     Corporate Bond Market: Corporate bond markets in India are not deep enough. There is a lack of buyers and sellers in the market; generally only institutions borrow from the corporate bond market because of its complex nature and the changing period tenure of the bonds. Additionally, there is no secondary corporate bond market. Every bond in the corporate bond market has a rating assigned by various rating agencies, and many institutions have a policy to only buy bonds which have a rating of more that AA.

3)     External Commercial Borrowing (ECB): Raising money through ECB is very popular among corporates since RBI allowed companies to borrow in foreign markets, albeit with a borrowing limit. This is a relatively inexpensive method of borrowing because the cost of borrowing in foreign markets is 3-4% (after the 2008 financial crisis) compared to 10-12% in Indian Markets. However, it is more risky because of exchange rate volatility. This is why many Indian companies could not access the ECB market, and instead bought foreign companies to access foreign borrowing market.

Mr. Sabnavis then described how the corporate debt is exasperated by other factors. Even though the growth number are high, they seem to be exaggerated. High food inflation has greatly affected the spending power of consumer. Further, the lack of a bankruptcy code and several stalled project in the economy has worsened the situation. If the corporate debt problem is not dealt with soon, the economy could face the following challenges:

1)     Investors will continue to pull of India due the problem of camouflaging of NPAs and stressed assets.

2)     Loss of competitiveness of exports since other emerging markets and developing countries have devalued their currencies.

Professor Ghosh then asked Mr. Sabnavis about why there has been so much talk about India growing at 8-10% despite having a banking crisis in the economy. Mr. Sabnavis remarked that the GDP numbers are sending the wrong signal about the economy and have to be looked at cautiously. There is a disconnection between new GDP numbers and physicals numbers, and one must look at incremental growth and not absolute data.

The discussion was then steered towards the public and private sector banks’ dichotomy.  Professor Ghosh asked if it was possible to get private sector banks to loan long term capital investments. Mr Sabnavis answered by saying that it would not happen because private sector banks are guided by boards and not the government. For instance, public sector banks can be instructed by the government to lend more to infrastructure sector, but this is not possible with private sector banks. Finally, Professor Ghosh asked if there was a possibility to allow private players to buy share in public sector banks – a bail in rather than a bail out. Mr. Sabnavis thought that this was highly unlikely because the government holds 51% of the shares in public sector banks, and the private players would not buy a bank they can’t control. The speakers ended the talk by taking questions from the audience.





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Date(s) - 18/03/2016
4:00 pm - 6:00 pm

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