DEFAULT – A VERY BAD WORD!

In one single day, we got news of three companies defaulting in payment of term loans.

Tilak Nagar Industries defaulted in payment of term loan worth Rs 15 crore, which was due on Jan. 31. Its total debt owed stands at Rs.560 crore.

Then there came news of DB Realty defaulting in payment of inter-corporate deposit worth Rs 85 crore; due date was 1st Feb. Its total debt payment stands at Rs.645 crore.

News of another default from Reliance Capital also came in- its due date was 31st Jan and it defaulted on payment due to Axis Bank and HDFC.

And in this background when we read this report from India Ratings, it is pretty scary. The report stated that it expects 16% of the corporate debt, which is pegged at Rs.10.52 lakh crore, might default over the next three years due to the prolonged slowdown in the Indian economy.

Of this, India Ratings stated that it expects 25% of the vulnerable debt to turn delinquent, which in turn is likely to result in incremental delinquencies to the extent of 4% of the system-level corporate debt.

The report added - in case the growth in real gross domestic product (GDP) sees a sharp recovery of around 7% in FY22, delinquencies could be lower by 87 basis points (bps) to 3.13% of the system debt. But, if the slowdown accelerates, to around 4.5% in FY22, delinquencies could be higher by an additional 159 bps to 5.59% of the system debt.

SEBI has made it mandatory for companies to declare their default every quarter and last quarter, 60 companies made the disclosure. They were the usual suspects, no surprises there. But as another quarter end comes, we cannot helo but wonder how the picture now looks.

The market is wary of the word “default.” Highly leveraged companies are currently concentrating on reducing debt through sale of non-core assets and there is no way they are going to get into any new project. This means growth for such leveraged companies is now stagnating and their improvement in margins can happen, at least for now, only by reducing debt.

These companies have, during the good times, allowed their ambitions to run unbridled, running ahead of reality and logical thinking. Getting into unrelated ventures, expanding beyond their means, these companies are today more caught up in servicing their illogical debts putting all growth on hold. So how is anyone else responsible for lack of growth? It is an easy way out to always lay the blame on others. Blaming the RBI Governor for being “too cautious” is indeed very immature. For now, these companies have to concentrate on cleaning up their balance sheets, getting aggressive on selling sub-standard investments of the pre-2008-09 heady days.

These companies are paying the price of unbridled, mindless ambitions but sadly the shareholders and banks are paying a high price. Whom do we blame for all this?