Corporate Debt is not Born in the USA

Corporate Debt is not Born in the USA - Wake Up India

Published: Fri, 03/08/19

08 March 2019

Recently the BIS or Bank of International settlements put out a report that highlighted what I covered in my recent Economic winter Report 3.0, the center of gravity lies in Corporate debt. Not just in the world but in India as well. Below is a brief cut out from the note I wound online. Corporate debt in the US as a percentage of GDP is at the highest level ever.

The chart below from a presentation made by Mike Maloney explains that while prior to 2008 it was Financial and Household debt that grew exponentially, after 2009 it was government and Corporate debt that has been holding the Baton for growing credit in what is a credit driven economic system. So clearly the government is not going to be the one at fault for bringing the system down. The burden has shifted to the Private sector.

Unfortunately India is still to even start recognising there is an issue here. Though I believe the authorities are well aware of it. The ILFS case is one to point to. Since then the lobby is pushing for rolling back downgrades, holding back of NPA recognition or referring case to NCLT. If all of that happens at once the corporate bond market in India will go into a tizzy. Not to say that India does not have any such market which is either liquid or deep like the developed world.

I noted in my Economic Update that non Govt Debt to GDP in India has crossed nearly 100%, growing faster than the public debt. It has been the reason behind whatever growth India has witnessed. In doing so now the private sector is at the risk of falling into a debt trap, where you have to borrow more to service existing debt. Then you know why there is such a loud cry to lower interest rates. It is a case of survival now

In the meantime some of the more recent cases have brought out the new and bigger issue of Pledged shares. Actually the first time this came up was at the end of the 2008 crisis, but then markets recovered and it was forgotten. However now at peak market levels the tool has been used even more to any fall in the market puts lenders at risk of default if margins are not coughed up.

In short add this to what should be margin funding for stocks, except that in this case they are the promoters of the company itself.

Similarly it is not clear to what extent Indian NBFCs have played a role in evergreening the books of corporate borrowers and how many more cases like ILFS will come up if India faces a stock market sell off.

If you believe that India is not a leveraged economy then you are fooling yourself. It is not a question ever of how much your gearing is, do not compare with the US that is printing its own reserve currency to finance existing debt. In our case we need constant liquidity too. And for now a lot of it has come from foreign investors who are being allowed to pick up all the corporate credit they can, yes that was passed in the recent RBI policy. However if global liquidity dries up then who is going to finance the great Indian credit cycle. RBI? At the cost of the Rupee?

Think about it, it is not as straight forward as it seems.

And it is a crisis at the heart of the Indian growth story that no one wants to talk about

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Rohit Srivastava
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