Corporate & Financial Sector Performance – RBI Report..

Corporate sector have improved its financial position substantially during first half of 2016-17 as per the Financial Stability Report published by RBI last week. However, the impact of this on bank NPAs is still not visible. Gross NPAs of the banks has increased during the last six months and may take some more time before it comes down. 
The RBI report is quite different from other corporate sector report card as it gives a comprehensive picture covering more than 2,500 companies. As per the report, the sector recorded substantial improvement in profits with return of assets rising from 2% to 3% during the half year. Even though there is an increase of nearly 8% in total borrowings, this is accompanied by even greater increase in retained earnings. This resulted in debt-equity ratio coming down from 38% to 32% after being stuck at that level for two years. Other than d-e ratio, interest expenses as a percent of debt fell substantially from 10% to 9.3% which provides fiscal space to the companies. Servicing of existing debt is considerably sensitive to interest rates, even though its impact on new investment decision may be limited. (Which is more dependent on demand outlook).
The report also analyses the performance of “weak” companies (Operating profit less than Interest cost), whose number came down by nearly 50. More importantly, the share of these companies in total corporate debt fell sharply from about 25% in March’16 to less than 15% by Sept’16. In terms of sector, Metals and Power remain the most stressed with high debt as well as low profitability. While telecom also has a high level of debt but with higher debt servicing ability, its stress level is lower.
Despite the improving corporate performance, banking sector, largely the public sector, has witnessed increase in level of stress. Gross NPA of the sector rose from 7.8% in March to 9.1% in Sept whereas stressed advances rose at a lower rate from 11.5% to 12.3%. Large borrowers are the biggest culprits with their share in total GNPA rising from 86% to 88% even though the share in total loan has come down from 58% to 56.5%. A large borrower is defined as one having more than Rs 5 crore of debt exposure. To reduce the disproportionate risk posed by this segment, RBI last year mooted a proposal to limit their borrowings. (Read more – The increasing government thrust to encourage lending to SMEs should also help banks reduce their risks from large borrowers.
The divergence in corporate and financial sector performance is quite perplexing as an improving corporate position should lead to flow of funds to banking sector and reduction in NPAs. While one reason for this could be skewed nature of corporate performance, whereby the stressed sector/group of borrowers are still in trouble, the other reason could be delay in shift of funds. With demonetisation affecting the growth momentum, it may be a while before banking sector stress comes down.
(Image courtesy of ponsulak at

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