Tough times for debt laden companies

Tue, 16 Aug Pre-Open

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There seems to be no respite for Indian companies from the continuously worsening business environment, especially for those which are laden with huge debt. Fears of slowdown are looming large in the whole economy after the recent debt crisis in the USA and some of the European countries.

And to make the situation worse, still there is no sigh of relief from the inflationary pressure. The Reserve Bank of India (RBI) has already raised key lending rates 11 times since March 2010 by a total 3.25% to tame inflation. This would definitely hurt the growth of companies as it is pushing corporate loan rates northwards. Companies which are not leveraged much are feeling the heat with regards to their financial performances. But companies, which are deeply indebted, are going to face several other problems as well.

Companies especially from the capital intensive sectors such as infrastructure, telecom, realty, power etc are facing major problems. Some of them have already started defaulting on their loan obligations. As per Crisil estimates, there would be more credit downgrades and defaults for the Indian companies in the coming months. Weaker business environment, stubborn inflation and increasing interest costs are worsening the debt servicing capacity of these companies. These companies would also face problems in further fund raising and debt restructuring. Many promoters have raised loans by pledging shares of their companies as collateral. As stock prices decline, they are required to pledge more shares to meet the collateral requirements. Otherwise, shares of the companies would be taken over by the lenders. The recent example is the takeover of the shares of GTL Ltd, a telecom tower firm, by ICICI bank.

All this does not bode well for the whole Indian economy as it is just not the problems for the debt laden companies. Banks are also facing the risk of having higher bad debts on their books. As per Crisil estimates, for the financial year ending March 2012, bad loans at Indian banks are expected to rise to about 2.6% of their total assets. This is definitely a bad signal as the same was around 2.3-2.4% since 2008.

Now our policymakers are in a great dilemma. On the one hand they need to curb rising inflation. On the other hand, growth rates are at stake. And deteriorating global economic conditions are adding to their woes. Though off late oil prices have eased a bit, there are chances of a third round of quantitative easing by the USA government. If all these bad signals persist for an extended period of time, we may again face a slowdown.