The financials of a number of Indian giants, including Tata Steel, Tata Motors, Tata Power, Hindalco Industries, Bharti Airtel, Essar Steel, Jindal Steel and Power, Sterlite Industries, HCL Technologies, Sulzon Energy, Adani Enterprises and Adani Power, JSW Steel, GVK, GMR, Jaypee, Reliance Infra, BHEL, NMDC, Grasim Industries, Coal India and IDFC, are under stress as also of scores of others. Occasional stock market surges are hardly lifting investors’ sentiment in these scrips, which were, until recently, seen as market leaders. Amidst the widespread gloom, it seems corporate juggernaut Reliance Industries Limited (RIL), pampered by price and policy support from the government, is the only one still managing to beacon.

The looming industrial sickness also threatens to adversely affect the fitness of the financial sector. Crisil has warned that stress will increase in the core sector leading to higher non-performing assets (NPAs) in the banking system. Barring HDFC Bank and Kotak Mahindra, all other listed banks, including giant SBI, PNB, Axis and Bank of Baroda, are already feeling the heat. For instance, Andhra Bank’s net profit for 2012-13 dropped by 36 per cent as its NPA went up by 100 per cent last fiscal. The core sector growth is crawling at around only 0.1 per cent. JSW Steel suffered Rs.385 crore first quarter (FY14) loss.

According to an independent study report, economic slowdown and higher cost of funds have resulted in listed commercial banks showing a 51 per cent rise in bad debts in 2012-13 over the previous year. It said the combined bad loan of 39 listed banks after making provisions rose 51 per cent to Rs 92,825 crore, last year. The latest news is that SBI and Axis Bank have grudgingly agreed to cut interest rate by 300 basis point to 10.15 per cent to refinance Rs.4,700-crore for Hindalco’s Utkal alumina project. If anything, the deal exposes the desperate situation facing both lenders and corporate borrowers.

Shares of public sector banks such as Allahabad Bank, Indian Bank, Bank of Baroda among others have crashed up to 25 per cent over the past few weeks on fears of growing NPAs in sectors like chemicals, pharmaceuticals, steel, mining, non-ferrous metals and textiles. Crisil has said that a third of the 11,500 companies it rates may not be in a position to service debts this fiscal as the Reserve Bank’s (RBI) tight money policy soaking up liquidity to shore up Rupee stretches payment cycles. RBI measures could further push up cost of corporate borrowings.

However, it would be unfair to blame RBI for using its only option to dry up excess liquidity in the market which is swallowing its foreign exchange reserves as rich Indians, including businessmen, are into splurging funds abroad like never before. For instance, last year alone, almost a quarter of the houses and luxury apartments sold in London’s Mayfair were reportedly bought by Indians for up to £3,500 (Rs.3,00,0000) per square foot. Indians ranked second, only after Britons, in real estate acquisition in the UK, last year.

Unfortunately, RBI today is allowed to play only a limited role in its multiple function as a central banker, monetarist and foreign exchange controller. Its actions are often seen as the result of continuous promptings and pressure from the union government. If RBI were in control, there would have been much lower current account deficit, less fiscal profligacy and inflation. Despite the constraints, RBI has tried to hold the interest rate regime and money supply to control inflation and partly protect Rupee. Things would have been much worse if RBI fully surrendered its authority under pressure from the pro-industry and pro-rich government.

Certain recent actions of RBI easing norms for foreign borrowings, including allowing ECBs for infrastructure projects and the use of ECB fund for import of even services to pay for technical know-how and license fees as part of capital goods import lack merit under present circumstances. Such decisions must have been taken by the central bank at the behest of the government having little concern about how they could spell doom for Indian industry at the time of repayment.

Foreign acquisitions by Indian corporate houses in the last five years with foreign borrowings such as Anglo-Dutch Corus by Tata Steel for $12 billion, Canada-based Novelis by Hindalco for $6 billion, Jaguar-Land Rover by Tata Motors for $2.3 billion, Axon UK by HCL Technologies for $658 million, German wind-turbine maker REPower System by Sulzon Energy for $1.3 billion, Kuwait’s Zain Telecom by Bharti Airtel for $9 billion and two Brazil-based sugar firms – Vale Do Ivai SA and Equipav SA – by Sri Renuka Sugars for $1.3 billion now threaten to eat heavily into surpluses of Indian companies as Rupee lost its value by over 50 per cent in the interim period. This year alone, Rupee had shed its value in terms of Dollar by 10 percent. Only 50 per cent of ECBs by Indian companies are hedged.

The Indian currency’s depreciation is raising input costs across many sectors amidst weak demand environment as indicated in the top-line growth trend in 2013-14. Even exporters are unlikely to benefit much from Rupee’s fall as importers may seek to renegotiate contracts. Indian companies have been increasingly resorting to borrowing abroad to take advantage of the lower interest rates on offer. For example, ECBs for infrastructure projects attract almost ‘zero’ interest rates. Around 40 per cent of debt of the CNX Nifty companies, barring banks and financial services firms, is denominated in foreign currency. Rupee’s crash has inflated their debt repayment liability.

The pressure of servicing the inflated cost of domestic and foreign borrowings is giving India Inc. sleepless nights. The government and RBI are entirely responsible for the situation, following wrong economic policies and priorities. They were highly overoptimistic about large and continuous foreign fund flows into the economy to spur growth, increase income and savings and reduce fiscal and current account deficits. The gullible industry believed in government optimism and economic forecasts. It ignored basic fundamentals and borrowed heavily to expand at home and abroad. Now, debt is dangling like Damocles sword over its neck. (IPA Service)