22 July 2024 : Indian Express Editorial Analysis

 1. Bankrolling growth

(Source: Indian Express; Section: The Ideas Page; Page: 11)

Topic: GS3– Indian Economy

Context:

In the past decade, companies have significantly improved their ability to finance capital expenditure, increasing more than threefold due to deleveraging and profit growth. According to a CRISIL analysis, this improvement has coincided with a marked reduction in bad loans and timely recapitalization in the banking sector, placing banks in a strong position to lend. Together with the rise of alternative credit channels and financial innovation, the available growth finance for infrastructure and corporate capital expenditure is unprecedented, even when measured as a percentage of nominal GDP.

Improved Financial Health and Gearing Ratios

• Indian companies have seen substantial improvements in their financial health. Cash accruals have risen, capital expenditure requirements have fallen, and working capital cycles have improved.
• An analysis by CRISIL shows that the median gearing (adjusted debt to adjusted net worth) of companies was at a decade low of around 0.45 times as of March 31, compared to around 1 time in 2015.
• This indicates a significant reduction in leverage and a greater capacity to take on new debt. Even if the median gearing increases to 0.75 times, many companies will still have substantial headroom to undertake new projects.

Banking Sector Resilience

• The banking sector has shown remarkable resilience and improvement. From March 31, 2015, to March 31, 2024, the absolute net worth of the banking sector more than doubled to approximately Rs 24 lakh crore from Rs 9 lakh crore.
• Net non-performing assets (net NPAs) have decreased to an all-time low of around 0.6% from a peak of 6%, while gross NPAs have also significantly reduced.
• The provisioning coverage ratio has increased to a historic high of 76.4%, limiting the incremental impact on profitability from potential losses on NPAs.
• Additionally, banks have undertaken substantial write-offs to clean up their balance sheets, with gross write-offs exceeding Rs 15 lakh crore between fiscal 2015 and 2024.

New Avenues for Fundraising

• The Indian credit market has seen the emergence of new fundraising avenues such as infrastructure investment trusts (InvITs), real estate investment trusts (REITs), restricted groups (RGs), and sustainability-linked and green bonds.
• InvITs have attracted both equity and debt investments from public and foreign investors, allowing infrastructure developers to monetize revenue-generating assets and free up capital for new projects.
• Since their introduction in 2017, over 19 InvITs have amassed assets under management (AUM) of Rs 4.9 lakh crore, with half funded by debt. Similarly, REITs have gathered Rs 1.4 lakh crore in AUM, with a third funded by debt.

Strengthening the Corporate Bond Market

• The domestic corporate bond market needs to deepen further to become a substantial source of funding. Infrastructure issuances currently account for 15% of annual corporate bond issuances by volume.
• Policy pivots such as allowing investments down the credit curve, increasing exposure limits to the infrastructure sector, and adopting expected loss ratings can make these investments more attractive to patient-capital investors like insurers and pension funds.
• Enhancing the capacity and risk appetite of the corporate bond market will facilitate take-out financing of operational infrastructure projects, creating additional credit capacity for new and emerging sectors such as green energy.

Conclusion

• The capacity for growth finance is at its best in a decade. Regulatory facilitation, relentless execution, strong credit discipline, and income spurs for demand growth are crucial to unlocking this potential fully.
• Maintaining a focus on sustainability will ensure a sustained and enduring ascent for India’s economic growth.

Practice Question:  Discuss the factors that have contributed to the improved ability of Indian companies to finance their capital expenditure over the past decade. How has the banking sector’s transformation supported this trend? (250 words/15 m)