Most companies need to borrow money to set up a business, run the day-to-day operations and execute new projects. This is why debt is crucial for a company’s survival. However, too much debt can become problematic. The interest the company pays on the debt can become too costly and eat into profits. It can even lead to a company’s downfall. This is why investors keep a close eye on their company’s debt levels.
India Ratings, the Indian arm of credit ratings agency Fitch, recently analysed the finances of the top 500 borrowing companies in the country. It checked how these companies borrowed and used the money between FY11 and FY16. The agency then made certain important observations.
Here are five important numbers about the India Inc’s debt you need to know:
Price rise is one of the biggest factors that the RBI takes into consideration. And it has also been the most troubling point. In August, however, retail inflation fell to a 5-month low of 5.05% after remaining stubbornly high at the 6% levels. This was because food inflation—the actual sticky problem—fell between July and August. This gave the RBI headroom to cut interest rates.
This is the amount of good debt in the books. They belong to 234 companies that are profitable, financially healthy, have a high capital and good asset quality. This is because they invested the borrowed money for productive purposes like investing a new project, etc. Productive assets help the company grow in the future. The companies predominantly fall in the auto, cement, chemical and pharmaceutical sectors, India Ratings said. These are companies you can consider investing in. “Such corporates are the primary beneficiaries of an economic recovery on account of strong asset quality,” the report said.
The GST and the effects of the 7th Pay Commission are the other two factors that could push inflation higher. However, the RBI notes that impact of the GST is likely to be limited. It’s expected to affect only 50% of the goods measured by the Consumer Price Index (CPI)—the key yardstick of retail inflation. Plus, it’s only expected to last for 12-18 months, according to the policy document. This means the RBI envisages risks to be lower than earlier—another reason for the cut in interest rates.
Just because a company is vulnerable does not mean its debt is at risk. So, not all the debt worth Rs 12.4 lakh crore is at risk. (By risk, we mean the probability of not being paid back.) This is because some vulnerable companies have a higher amount of productive assets. Moreover, they are currently facing poor demand situations. So when the economy grows faster in the future, they stand to make higher profits, which can be used pay off debt. However, Rs 7.4 lakh crore worth debt could be at risk because of the company’s non-productive use.
Of the Rs 7.4 lakh crore, debt worth Rs 4 lakh crore is at really high risk. These belong to 85 companies. Lenders may have to write-off this debt. This is when the company fails to pay back its loan. So, the lender has to write off the loan and announce it as a loss. The remaining debt worth Rs 3.4 lakh crore belongs to 26 fairly strong companies that could easily service their debt.
How bad is India’s corporate debt problem? Read more
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