Statsguru: India Inc's debt dynamics

The financial position of India Inc is deteriorating.

As Chart 1 shows, the solvency ratio, a measure of a firm’s ability to meet its debt obligations, has deteriorated to 20.6 per cent in the second half (H2) of the previous financial year, from 27.4 per cent in the first half (H1). 

 

 

A similar deterioration is observed in the interest coverage ratio as well. The ratio, which measures a firm's ability to service debt, has declined to 4.4 in H2, from six in H1.

And, while the debt to equity ratio at the aggregate level declined over the past year, a staggering 40 per cent of companies saw an increase in their borrowings, as shown in Chart 2. These companies now account for 64.7 per cent of all borrowing.

 

 

The silver lining is that there has been a decline, albeit minor, in the proportion of highly indebted companies. As Chart 3 shows, the percentage of firms with a debt to equity ratio greater than two had fallen to 10.4 per cent at the end of March 2017, down from 11.5 per cent in the quarter ended September 2016. 

 

 

But dig deeper, and one finds that in some sectors, the pain is increasing. As Chart 4 shows, stressed assets have risen in sectors, such as, base metals, textiles, food processing, mining, engineering, cement and motor vehicles.

 

Telecom, power, and iron & steel are the worst affected, as shown in Chart 5. 

The problem appears to be largely concentrated among big borrowers. As Chart 6 shows, large borrowers account for 56 per cent of all loans by scheduled commercial banks (SCBs) and 86.5 per cent of all non-performing assets (NPAs). Of these, the top 100 large exposures account for 15.2 per cent of gross advances and a quarter of gross NPAs of SCBs.