From the Editor
http://www.businesstoday.in
Rationalising Debt
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n 2003, the global economy started growing rapidly, after two years of lacklustre growth following the great tech crash of 1999/2000. The growth
peaked in 2006, and the year 2007 continued to be nearly as good. In the
western countries, the growth was largely fuelled by a housing bubble and a
boom in the financial markets that were creating and trading in all sorts of exotic
instruments. Only a small fraction – less than 10 per cent by some estimates –
went to businesses that were not in the real estate or finance sectors.
In developing countries – especially the BRIC nations – growth was driven
more by real industrial capacity creation and growing consumer demand.
Among the corporate houses in India, this was a time of great optimism and
most big companies and groups chalked out highly ambitious growth plans,
which included big greenfield projects as well as domestic and overseas acquisitions. Companies were drawing up humongous investment plans in
every sector. Most of them borrowed heavily from banks and also issued
debt instruments to finance their plans. The period 2004-2008 saw an industrial credit boom in India, with a big chunk of money going to infrastructure and realty.
In the US and Europe, the problems in the financial sector were apparent as
early as 2007, but it was in September 2008, when the Lehman Brothers filed
for bankruptcy protection that the real crisis hit. Lehman Brothers was the single
biggest company to have filed for Chapter 11 bankruptcy
protection till then.
The Lehman Brothers’ crisis roiled the global financial
markets and most economies around the world were faced
with an abrupt slowdown. In the US, the way to stave off
the unprecedented crisis was a government stimulus.
In India, though, the full effects of the global economic
slowdown was not felt even in 2009. By 2010, the government had realised that India was not exactly insulated
from the global crisis even if the worst had been avoided.
To keep the economic growth from slowing further, the
Indian government decided to provide a mild stimulus to the economy and
encouraged companies, especially infrastructure companies, to take even more
loans. The idea was that as more projects got off the ground, the economy
would start growing fast again.
In theory it was a good idea, but it didn’t work out well in practice. Banks,
especially public sector banks, lent money aggressively to all sorts of companies,
without exactly examining cash flows or project feasibility too carefully.
The fact that the UPA government itself was making all sorts of mistakes
and was in the grip of a policy paralysis made many projects unviable. By
2013/14, Indian business groups and companies had enormous debt on their
books, some of which could clearly not be serviced easily because their revenue
projections were badly off the mark. Meanwhile, public sector banks saw their
non-performing assets or bad loans rising to crisis proportions.
In the past two years, several companies – especially the big ones – have
tried to rationalise their debt. Some have done it proactively, while others have
been pushed by banks (which in turn were prodded by the Reserve Bank of
India). Some have just tried to sell off assets acquired during better times. Others
have refinanced debt, swapping high-cost debt with low-cost ones. Still others
have raised equity to reduce the debt burden.
Our cover story (page 48) by Managing Editor Rajeev Dubey looks at how
companies have started managing their debt actively, and what are the lessons
that can be learnt from the best ones.
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