India leads Asian peers in risky corporate debt; interest payouts up 15%

A large part of India’s corporate debt has turned risky in the last decade, according to a recent McKinsey report

The government’s intent to deepen the bond markets, expressed by Finance Minister Nirmala Sitharaman last week, assumes great importance as India’s debt market remains shallow.

India Inc’s corporate debt (including bank loans) stands at 56 per cent of the gross domestic product (GDP), lagging its Asian peers (Chart 1). A large part of this debt has turned risky in the last decade, according to a recent McKinsey report. It shows that the proportion of long term corporate debt wherein the company’s interest expenses were more than two-thirds of their earnings rose from 13 per cent in 2007 to 43 per cent in 2017 (Chart 2).

This is validated by recent data, too. From being nearly stable a couple of years ago, interest expenses of listed Indian companies grew at 15 per cent in June 2019 quarter (Chart 3).

Corporate bonds (CB) occupy a meagre 8 per cent share in India’s overall corporate debt (Chart 4), suggesting that banks still dominate corporate finance. Though India’s CB market has tripled since 2012, it is still not deep enough (Chart 5).

To add to this, CBs have become riskier in recent months. Yields on AAA-rated corporate bonds have not declined in line with fall in G-Sec yields and repo rate (Chart 6). The former’s spread over G-Sec yields has risen from 77 basis points to 139 bps in nine months.

The external commercial borrowing is now growing at a slower pace than before. Cumulatively, it is at $200 billion for two years (Chart 7).