Commentary/Yazad Darasha

Surveying the Sunrise

Life is tough for Indian corporates these days. There is no money for working capital, none to to expand, and even less to meet fiscal commitments.

It is not that the companies cannot borrow from the banks and institutions. But are the latter lending? Even at the relatively high interest rates approaching 30 per cent per annum (on a real basis), the banks and institutions appear to be refusing to lend to industry.

On the other hand, the banks and institutions claim there are no borrowers coming forward. That is hard to believe at a time when the only source of funds is a term loan. The equity market for Initial Public Offerings has virtually collapsed. If a company cannot garner funds from an equity offering -- as there are no takers -- and it cannot generate enough resources internally -- as offtake across the board has slowed down tremendously, where else would it turn for funds but to the lending institutions?

Most companies have scaled down production because consumer offtake is dwindling -- whether it is in consumer goods or in steel and cement. At the same time, there seem to be no concrete plans to move into greener, sunrise areas of operation -- perhaps like services -- to offset this slowdown.

One reason could be the lack of funds. And that is where the lenders come in. It is not as if the banks and institutions do not have the cash to disburse. By its own reckoning, the banking Goliath -- the State Bank of India -- has upwards of Rs 35 billion to lend to companies, but claims there are no borrowers coming forward.

According to SBI chairman P G Kakodkar, the bank's credit portfolio has shown an unprecedented dip in this financial year, the start of the busy season notwithstanding. Kakodkar says that in spite of the availability of credit, corporates have not utilised up to 30 per cent of their exposure limits.

Export credit too has remained stagnant or has reported negative growth. This is in line with overall exports between April and October 1996 growing at the rate of just 10 per cent, compared to 24.4 per cent in the same period in the previous year. Kakodkar's contention is that the money is there for the lending, but there are no takers. So what is SBI going to do with the funds earmarked for the corporate sector? It will deploy them in non-convertible debentures of Indian companies.

At the same time, however, there are still disputes about lending to sunrise sectors like mobile telephones and Internet services. The Industrial Development Bank of India -- the equivalent of SBI in the financial institutions segment -- recently laid down a pathbreaking directive: that the licence of a mobile telephone operator can be pledged in lieu of a loan.

The only problem here is that the mobile phone operator's expansion plans must have received a setback while the IDBI board was debating whether the licence is pledgable or not. No one can blame the institution for the delay; after all, it needed to work out whether the telecommunications ministry would allow transfer of the licence in case of default or takeover.

So the other side of the coin is that there is actually a demand for funds from certain sectors of industry, like services. Why aren't funds flowing in to that segment?

In fact, the newest sunrise sector is likely to be insurance, if Finance Minister P Chidambaram remains finance minister till the February Budget and if he translates all the recent talk in to action and opens the segment to private initiative. Now what really do we know about the insurance sector, except for the public sector experience? Is the growth potential enormous? Or is the likelihood of default high? Can a bank or a financial institution afford to take the risk of lending, knowing that the problem of non-performing assets has been a real bugbear in the past?

That is exactly the point. The paucity of information about the industry and/or policy decisions that could affect lending seems to be the sticking point. What is needed here is an organisation that will take up the challenge of undertaking definitive surveys of sunrise sectors, for public consumption at a price of course, with the aim of preparing the lending institutions for the time when the players in these sectors come for term loans.

Every prospective borrower comes to an institution with his own survey of the segment in which he operates. While these surveys provide invaluable information to the institution, they are unlikely to also look at the downside. Hence the need is for such surveys to be taken up by an organisation with impeccable integrity, the drive to research, and the ability to see every side of the picture, frame by frame, with unstinting impartiality.

Such surveys would make better sense if they not only examine the sector, but also extrapolate from current situations to a scenario of slowdown (no sector can indefinitely keep up the tempo of growth it records in the first years of the 'sunrise'), and see which policies or forces would come in to play. This would be invaluable in terms of not only the lenders' perception of long-term risk, but also the borrowers' responses to emerging situations. A case in point is again mobile telephone services, where the ministry is still to decide whether a licence is transferable or not, in case of default or takeover.

Until such Sunrise Surveys (if we can dare to give them a name even before they actually become reality) are undertaken, we will continue to have situations where the cost of funds will become higher only because the money was blocked while the lenders worked out crucial components of the sector's profitability prospects. And delayed funding, as any company will tell you, actually pulls down profitability, resulting in the start of a vicious cycle.