India is poised to be the fastest growing economy in the world and has the potential to grow even faster. The lessons of the past have been well learnt by both banks and companies, and it is this newfound wisdom, with supportive policies that can help the country achieve its true growth potential

Over the last few years, the headlines in the pink papers have been dominated by stories of corporate credit stress in the aftermath of the global financial crisis. Big names such as Kingfisher, Deccan Chronicle, S. Kumar's, Jaiprakash and many more have found their way into these media reports, mainly for defaulting on some loan facility or struggling to meet debt commitments.

These are just a few of the high profile names in the news, but the burgeoning gross non-performing asset ratio of Indian banks pegged roughly around 4.45% in March 2015, show that the malaise runs far deeper. Overall stressed assets, which includes gross NPA and restructured advances, at 10.9%, gives an even starker image of the troubles facing corporates in India.

Banks have been bulking up their retail loan books, to bolster their balance sheet with better performing credit and also as they have grown wary of lending to corporates. Most of the stress has emerged from the infrastructure sector, mainly power, roads and ports, mining, metals and allied sectors such as commercial vehicles and construction equipment financing. The weak global outlook has also dented export prospects with many companies that had built huge capacities during the mid-2000s boom period, left with huge debt and empty order books.

Supply side issues, exacerbated by some judicial decisions such as on spectrum and auction processes, have left many companies in the telecom, power, mining and allied sectors ruing their decision to scale up business. Tax-related issues between the government and companies, especially foreign investors have also played its part in spooking fresh corporate lending.

In many cases, the last mile linkages such as coal supply are now being ironed out and even spectrum auctions are taking place, but once again a long road needs to be traversed before the sentiment turns positive on corporate lending. Once bitten, twice shy, banks use the word 'cautious' liberally when they talk of their current approach to corporate lending.

In many cases, banks have completely shut down lending to new projects, either due to the aforementioned caution or due to companies not emerging with projects at a time when they continue to sit on under-utilized capacity. This has led to shrinking of banks' corporate term financing book with just a little working capital demand being met by lenders.

This risk-averse lending approach has resulted in lack of credit growth for banks, far under shooting the thumb-rule that banks' credit growth should be at a 2.5-3.0 multiple of the country's GDP.

The policy paralysis that plagued the previous regime in the last years of its tenure, and the current government's clear but gradual approach towards supporting corporate investments, has also led many companies to go slow on their capex plans. Recent decisions by the Narendra Modi government, including auctions of resources, passage of legislation even via the ordinance route, has led to some hopes that corporate credit growth for greenfield and brownfield projects will pick up by the end of this calendar year.

The RBI's stricter norms on restructuring that imposes higher provisioning for all restructured loans, greater push for resolving problems via joint lending forums, encouragement for greater data sharing amongst lenders and even talk of creation of a corporate fraud database will help banks get their act together. A lot of dirt that was earlier swept under the carpet is now out in the open, and augurs well for a transparent approach towards future lending.

This is a period of deep soul searching for banks and corporates. Both have tough lessons to learn from the reckless growth during the boom period and then the subsequent problems that emerged when crisis hit domestic shores. This provides banks an opportunity to improve their processes and to build in better early warning systems, while companies will also learn to be a little more result-driven rather than expectation driven when they make their capex loan proposals.

The immediate task ahead, which will provide business for banks, is to help companies complete viable stalled projects and to make them productive assets for the economy. When these projects take off, a lot of small and medium enterprises that are stressed due to lack of payments from the larger companies will also benefit and move out of the banks' stressed assets portfolio.

The focus of banks should also be on helping companies move out of the non-performing assets category or restructured portfolio through supporting more realistic business plans. Improvement in the status of these corporate bad loans will also reflect positively on banks' asset quality ratios, provision requirements, capital costs and eventually profitability.

The country's GDP, as per the revised methodology, is pegged at over 8% in 2015-16, and it is imperative that this growth will need a greater push from government legislation and even streamlining of existing processes. A stable and supportive tax regime, no flip-flops on policies and possibly even lower interest rates, if the Reserve Bank of India continues its monetary easing cycle, will also help provide the necessary growth impetus for the corporate sector. Efforts such as 'Make in India' and 'Digital India' will also be key to supporting indigenous manufacturing efforts and also ensuring the best use of technology.

 

By Editorial Team

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