Rebooting Economy XIII: Why Indian corporates are debt-ridden
India faces a fresh threat of NPAs with RBI warning dramatic rise in loan default rate from 8.5% in FY20 to 14.7% in FY21. A global study shows the Indian corporate sector was most debt-stressed with 43% of long-term loans vulnerable to default even before the COVID-19 pandemic hit

- Aug 5, 2020,
- Updated Sep 4, 2020 10:01 AM IST
On July 31, 2020, Finance Minister Nirmala Sitharaman announced that talks were on with the banking regulator RBI to extend the moratorium on repayments and restructuring of borrowings beyond August 31.
This was after the RBI released its Financial Stability Report on July 24 issuing a dire warning: Macro stress tests indicate that the Gross NPA (GNPA) ratio of the Scheduled Commercial Banks (SCBs) could rise from 8.5% in FY20 to 12.5% under baseline scenario and 14.7% under very severe stress in FY21 because of the lockdown-induced economic disruptions.
Although Sitharaman's statement came in the context of hospitality industry, extension of moratorium or restructuring of borrowings can never be restricted to one sector since many others, like aviation and MSMEs, are hit equally hard too.
Evidence shows such remedies are fraught with damaging consequences for the economy by worsening the debt crisis and weakening banking finances. But before getting there here is how big the debt crisis is.
Should the RBI then continue lowering interest rates to push supply-driven-credit? The repo rate (rate at which the RBI lends to banks) has fallen from 6% in April 2018 to 3.5% in May 2020, the capital reserve ratio (CRR) is down to 3% for FY21 with no corresponding gain seen in the economy.
Most of the liquidity gets parked in the RBI's reverse repo account and it is well known to bankers and policymakers. In effect, the RBI and government know liquidity infusion is a spectacular failure and yet the push for more of the same continues.
A day after the IMF's Kristalina Georgieva warned against the growing global debt, the main speaker of the event Jeremy Stein, a Harvard professor, issued a dire warning.
His presentation read: "Supply-driven credit booms - accompanied by aggressive pricing and erosion of credit quality - appear to play a big role in fluctuations in economic activity across a wide range of sample periods, countries, and institutional arrangements."
It said such supply-side credit push brings "not just financial crises, but garden-variety recessions as well."
Not long ago, economist Joseph Stiglitz too had warned against supply-drive debt push: "...periods of rapid lending are often associated with bubbles like the tech bubble and the real estate bubbles in the US. (There is again typically a causal link: rapid lending helps create and sustain these bubbles.) Such bubbles make the assessment of risk more difficult."
Here is a warning from India's largest public sector bank SBI about extending moratorium on debt repayment.
On August 3, 2020, its research paper said: (i) 70% of the total moratorium have been availed by corporates which are rated A and above - those who can easily repay with "comfortable debt-equity ratio" (those with comfortable debt-equity are spread across sectors like pharma, FMCG, chemicals, healthcare, consumer durable, auto, etc.) and (ii) consumer loans declined by Rs 53,023 crore in the current fiscal, but "consumer leverage in lieu of exposure to stock market" increased by Rs 469 crore that could be a potential source of financial instability".
It warned that a blanket extension of moratorium beyond August 31 would "do more harm than good".
As for restructuring of bad loans that the government talks of, the IBC was brought in in 2018 precisely because the earlier regime of restructuring was a disaster and ended up ever-greening bad loans and caused higher losses as more good public money was thrown after bad money year after year.
Here is more food for thought.
How does India's economic growth square up with growth in bank loans?
The following graph presents data from the RBI and NSO for a period of 15 years (FY06 to FY20).
The correlation seems tenuous, doesn't it? Thereby hangs another tale.
On July 31, 2020, Finance Minister Nirmala Sitharaman announced that talks were on with the banking regulator RBI to extend the moratorium on repayments and restructuring of borrowings beyond August 31.
This was after the RBI released its Financial Stability Report on July 24 issuing a dire warning: Macro stress tests indicate that the Gross NPA (GNPA) ratio of the Scheduled Commercial Banks (SCBs) could rise from 8.5% in FY20 to 12.5% under baseline scenario and 14.7% under very severe stress in FY21 because of the lockdown-induced economic disruptions.
Although Sitharaman's statement came in the context of hospitality industry, extension of moratorium or restructuring of borrowings can never be restricted to one sector since many others, like aviation and MSMEs, are hit equally hard too.
Evidence shows such remedies are fraught with damaging consequences for the economy by worsening the debt crisis and weakening banking finances. But before getting there here is how big the debt crisis is.
Should the RBI then continue lowering interest rates to push supply-driven-credit? The repo rate (rate at which the RBI lends to banks) has fallen from 6% in April 2018 to 3.5% in May 2020, the capital reserve ratio (CRR) is down to 3% for FY21 with no corresponding gain seen in the economy.
Most of the liquidity gets parked in the RBI's reverse repo account and it is well known to bankers and policymakers. In effect, the RBI and government know liquidity infusion is a spectacular failure and yet the push for more of the same continues.
A day after the IMF's Kristalina Georgieva warned against the growing global debt, the main speaker of the event Jeremy Stein, a Harvard professor, issued a dire warning.
His presentation read: "Supply-driven credit booms - accompanied by aggressive pricing and erosion of credit quality - appear to play a big role in fluctuations in economic activity across a wide range of sample periods, countries, and institutional arrangements."
It said such supply-side credit push brings "not just financial crises, but garden-variety recessions as well."
Not long ago, economist Joseph Stiglitz too had warned against supply-drive debt push: "...periods of rapid lending are often associated with bubbles like the tech bubble and the real estate bubbles in the US. (There is again typically a causal link: rapid lending helps create and sustain these bubbles.) Such bubbles make the assessment of risk more difficult."
Here is a warning from India's largest public sector bank SBI about extending moratorium on debt repayment.
On August 3, 2020, its research paper said: (i) 70% of the total moratorium have been availed by corporates which are rated A and above - those who can easily repay with "comfortable debt-equity ratio" (those with comfortable debt-equity are spread across sectors like pharma, FMCG, chemicals, healthcare, consumer durable, auto, etc.) and (ii) consumer loans declined by Rs 53,023 crore in the current fiscal, but "consumer leverage in lieu of exposure to stock market" increased by Rs 469 crore that could be a potential source of financial instability".
It warned that a blanket extension of moratorium beyond August 31 would "do more harm than good".
As for restructuring of bad loans that the government talks of, the IBC was brought in in 2018 precisely because the earlier regime of restructuring was a disaster and ended up ever-greening bad loans and caused higher losses as more good public money was thrown after bad money year after year.
Here is more food for thought.
How does India's economic growth square up with growth in bank loans?
The following graph presents data from the RBI and NSO for a period of 15 years (FY06 to FY20).
The correlation seems tenuous, doesn't it? Thereby hangs another tale.