The year 2013 is past us now and it's time for new beginnings. But we can hardly start on a right note without a review of what happened last year.
2013 was a year that India Inc wished had never come. It was a testing year for India Inc with the country facing macroeconomic challenges on multiple fronts. Weak growth, high inflation, slowdown in the investment cycle and rupee volatility gave little space to India Inc to grow. And as General Elections take centrestage in the coming year, it is unlikely that the year 2014 will be remarkably different.
One of the biggest headaches for India Inc was the rise in bad debts. The hangover of the same is likely to continue in 2014. The firms went overboard with borrowing and investment plans when the money was cheap. And now with the slowdown in demand, they are stuck with overleveraged balance sheets coupled with low capacity utilization levels and stalled projects.
As per an article in Economic Times, around 3,700 listed companies had debt worth Rs 24 trillion at the end of third quarter of 2013. That amounts to around a quarter of India's GDP. What is even more alarming is that one third of this debt is with companies that are not earning enough operating profits to cover their interest expenses. With huge capacities built on borrowed money and slowdown in the growth, companies are stuck in a debt trap. The problem is so deep that steps like cost cutting, refinancing and restructuring are unlikely to help.
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Already, the indiscreet use of CDR is reflecting in the performance of CDR cell. More and more accounts post restructuring are slipping back to NPA category. As RBI tightens rules for restructured loans and goes tough on bad debts, is there a way for companies to get out of the debt trap in a low growth phase?
As lenders become aggressive in recovery, the firms have little choice but to monetize the assets. Hence, the firms that can find the way out will be the ones willing and able to sell their assets. Infact, some of the firms, despite not being under distress are already exiting non core businesses for a better capital structure. Going forward, chances are that only the deserving companies with good quality assets will be allowed to use the lifeline of CDR.
We just hope that this consolidation out of desperation will lead to higher efficiencies in the business, improved capital structure and survival of the fittest. That said; such steps will not solve problems overnight. While the companies may find a way out of debt trap, unless investment cycle and demand in the economy revives, the businesses are unlikely to grow. To get out of low growth trap, we will need to speed up reforms, get rid of the bureaucratic delays and make India more investor friendly. It is not going to be easy for the Government to deliver, especially with elections scheduled in the first half of 2014. However, unless these steps are taken with strong political will, one can hardly hope for any recovery in the economy or better future for India Inc.
As lenders become aggressive in recovery, the firms have little choice but to monetize the assets. Hence, the firms that can find the way out will be the ones willing and able to sell their assets. Infact, some of the firms, despite not being under distress are already exiting non core businesses for a better capital structure. Going forward, chances are that only the deserving companies with good quality assets will be allowed to use the lifeline of CDR.
We just hope that this consolidation out of desperation will lead to higher efficiencies in the business, improved capital structure and survival of the fittest. That said; such steps will not solve problems overnight. While the companies may find a way out of debt trap, unless investment cycle and demand in the economy revives, the businesses are unlikely to grow. To get out of low growth trap, we will need to speed up reforms, get rid of the bureaucratic delays and make India more investor friendly. It is not going to be easy for the Government to deliver, especially with elections scheduled in the first half of 2014. However, unless these steps are taken with strong political will, one can hardly hope for any recovery in the economy or better future for India Inc .
We just hope that this consolidation out of desperation will lead to higher efficiencies in the business, improved capital structure and survival of the fittest. That said; such steps will not solve problems overnight. While the companies may find a way out of debt trap, unless investment cycle and demand in the economy revives, the businesses are unlikely to grow. To get out of low growth trap, we will need to speed up reforms, get rid of the bureaucratic delays and make India more investor friendly. It is not going to be easy for the Government to deliver, especially with elections scheduled in the first half of 2014. However, unless these steps are taken with strong political will, one can hardly hope for any recovery in the economy or better future for India Inc .
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