December 28th, 2015
Source: rediff | Image Courtesy: jhansitimes
Reserve Bank of India Governor Raghuram Rajan has expressed concern over the enormous debt faced by India Inc. and the inadequacy of profit to service the same. About 20% of India’s debt faces trouble due to either operating losses, or inadequate operating profits to cover the debt in the last financial year.
A debt of ₹ 5.65 lakh crore (a fifth of the total debt in India) was shared by 67 of the 441 top indebted companies in India at the end of the year 2014-2015. This theoretically makes these companies financially insolvent, which means that the company is no longer able to meet it’s financial obligations.
This number has increased from 49 last year to 67 in 2014-2015. The return on capital employed has hit 7.4%, barely a few basis points ahead of the average interest cost of 7.1%.
This is the lowest value recorded in the decade; in 2004-05, the reported RoCE was about 18% while the interest cost was 6.9%. This forces companies to spend a greater proportion of their operating profit on clearing debts than on capital servicing and growth.
The companies spent up to 34.2% of the profit on debt expenditure this year leaving little for capital growth. Analysts have a divided opinion on the happenings.
A majority are worried that unless the corporate earnings pick up, banks could be facing serious trouble, while some others see this as a cyclical trend which will get resolved as growth resumes and asset utilisation increases.