Cutting corporate debt

News: Indian companies are deleveraging i.e. that is there is reduction in their borrowed debt.

This trend is likely to continue, specially in the present pandemic situation. 

What are the indicators of deleveraging by Indian companies?

The debt-to-equity ratio of listed firms dropped to a six-year low of 0.59 in 2020-21, compared to 0.73 in the previous year.

Reserve Bank of India’s recent report on the banking sector has also revealed that non-financial private firms have been net savers over the last three years.  

What can be the reasons for this? 

Improvement in corporate and banking sector: As compared to the situation until a few years ago, the state of both the corporate and the banking sector has improved. The impact of pandemic-related disruption has been considerably lower than anticipated for both corporations and the banking system. In fact, earnings have improved for large corporations over the last few quarters.

Deleveraging process in the corporate sector is also being helped by buoyancy in the stock market, which has enabled firms to raise record money from the market. 

What can be disadvantages of this? 

While this points towards strengthening of the corporate balance sheet, but it also reflects the unwillingness of investors to invest and highlights the underlying weakness in the economy. 

This may impact the asset quality in the banking sector once the pandemic-related support extended to borrowers begins to be removed. 

This may also lead to sustained lower demand for credit. Especially when the credit demand is expected to remain low due to relatively low level of industrial capacity utilisation and weak underlying demand in the economy. 

Although Banks have been focusing on retail lending, but that too has limits as large number of households have suffered income losses

Source: This post is based on the article “Cutting corporate debt” published in Business standard on 13^th Jan 2022.