Page 27 - 30NOV2019EA

CORPORATE

Firms like Reliance
Industries with their
strong balance sheets
and healthy cash
flows have continued
to service their debt.
But a vast majority of
companies have ended
View of Rating Agency mutual funds reduced lending to NBFCs
Rating agency Standard and Poor’s (S&P) and HFCs, creating a cash crunch and up in a debt trap
has said in a note that “India’s finance forcing the shadow lenders to sell assets
companies are among the country’s larg- and cut back on new loans.
est borrowers. A substantial part of this
funding comes from banks. The failure of RBI take on debt
any large non-banking financial compa- A recent analysis released by the RBI
ny (NBFC) or housing finance company suggested that the failure of any top-five
(HFC) may deliver a solvency shock to HFC or NBFC could result in the default
lenders.” of up to two banks. The Reserve Bank
It said that this could have negative of India has also put caps on withdraw-
effects for credit growth and the econo- als by depositors after fraud in Punjab
my. S&P said it believes that “Even when and Maharashtra Co-operative (PMC)
credit is available, the higher borrowing Bank came into the fore. It has also issued payment is not much, these firms are
costs will likely hurt the profitability and a circular on dealing with defaulters able to keep their costs to a minimum.
growth of companies.” that retained the original spirit of its In the current scenario, the revenue
The rating agency said this contagion efforts to discipline borrowers and banks growth had turned anemic but the
runs the risk of spreading to real estate and has also put the onus on lenders debt size is growing. In the past few
companies. “Finance companies are to act quickly to preserve the value of years, while aggregate revenues
the largest lenders to this segment and assets instead of waiting for directions. grew merely 77 per cent, their debt
any failure among such institutions The circular has tightened the screws doubled and interest payout went up 146
could jeopardize credit flows to devel- on those who missed loan repayments per cent.
opers. The real estate companies are and scrapped all debt recast plans in Companies like Reliance Industries
already grappling with weak demand, favour of the Insolvency and Bankruptcy with their strong balance sheets and
low sales, and high leverage. We saw Code (IBC). healthy cash flows have continued to
this kind of contagion in Mexico after Experts say that when interest service their debt. But a vast majority of
the global financial crisis. The default rates are on the rise, the company’s companies — both big and small — have
of Mexican non-bank mortgage lend- cost of borrowing funds also increases ended up in a debt trap. The bottom line
ers sent some large home builders into sharply. This means that servicing debt is that in the current environment, debt-
default as well,” it added. becomes increasingly expensive and free companies offer a safer investment
Non-bank lenders have seen their it eats into a company’s profit. On the alternative. Investors will continue to
source of funds suddenly dry up after a other hand, companies with low or zero prefer such businesses till the time that
series of defaults by Infrastructure Leas- debt are in a much better shape in such the economic recovery sets in.
ing & Financial Services Ltd (IL&FS) that a scenario.
triggered a liquidity crisis. Banks and As the cash outflow through interest LETTERS@TEHELKA.COM

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