NEW DELHI: The tragic story of coffee baron GV Siddhartha, celebrated till recently as a successful entrepreneur, reveals a worrying face of India’s huge debt problem. Indian banks have merrily lent and corporates, used to the debt habit, have borrowed heavily way beyond their normal capacity to pay even as the economy slowed down, creating a debt conundrum difficult to address.
Siddhartha’s Coffee Day Enterprises had a narrow equity base of just Rs 211.25 crore and a debt of Rs 6,547 crore, implying a debt to equity ratio of 31:1. Even if the firm’s equity base and its reserves and surpluses were added up, the amount called shareholders’ funds was just Rs 2,529 crore, or just 38.6 per cent of its debt.
“Obviously, it was a case of overkill by both the bankers who lent, as well as the firm that took on such a huge debt to grow at a fast pace... This is unfortunately true of many firms in India today,” said Sanjay Bhattacharyya, former MD of SBI. “Deleveraging, which its board has opted for, is the obvious option.”
Most Indian corporates borrowed either from banks or the bond market when the going was good, and with an economic slowdown impacting demand, are today faced with a mountain of debt and little ability to pay. The shadow banking crisis is seen as a manifestation of this issue.
Old dictums of borrowing only according to one’s paying ability were often given a miss, as over the last decade businesses tried to grow at a fast pace while bankers tried to compete with each other.Bankers say habits die hard and both banks and corporates continue to lend and borrow unmindful of the consequences even when it is obvious the economy is slowing down. Corporate debt in India according to TransUnion CIBIL has grown from Rs 38.8 lakh crore in 2015 to Rs 64.1 lakh crore in 2019, over 65 per cent rise in four years. The companies’ combined borrowing went up by over 13 per cent in FY19 alone.
“Banks have a herd mentality. If one bank lends to a corporation, others rush in to lend, often without doing a proper study of the firm’s ability to pay. Look at Reliance Power, which is now deleveraging itself; its long-term debt to equity ratio is 0.07,” said director of a state-run bank.
A study released by Credit Suisse two years ago had warned that 40 per cent of India’s corporates have unsustainable debt levels where they are unable to earn enough to pay back interest costs, let alone principal.“The new danger is from retail loans. With a slowdown and increasing small business risks and job losses, there is a tendency for this kind of credit exposure to be in doubt,” said Bhattacharyya.
Personal credit
RBI data shows banks’ exposure to personal credit is also at an all-time high. Credit card outstanding grew to Rs 93,600 crore by end of May 2019, or by 12.5 per cent YoY. Personal loans grew Rs 6.2 lakh crore in 2019, against Rs 5 lakh crore last year.