ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Assessing the Financial Health of the Indian Corporate Sector

The long-term trend in the financial soundness of the Indian corporate sector is examined using balance sheet information and the most stressed sectors are identified. A corporate vulnerability index is constructed using financial indicators which captures various dimensions of stress in the Indian corporate sector. The study reveals that corporate debt vulnerabilities increased in the aftermath of the global financial crisis with a notable reversal after 2016. The sectoral analysis identified that there has been a significant improvement in debt-to-GDP ratio and debt at risk, notably after 2016, even as sectoral idiosyncrasies remain. While the earlier impact of COVID-19 was reckoned to be severe, the corporate sector showed an impressive rebound, albeit uneven.

The views expressed in this article are those of the authors and do not represent the views of the Reserve Bank of India.

The Indian corporate sector1 was grappling with inherent vulnerabilities even prior to COVID-19 owing to the slowdown in the economic growth, a fallout of which was rising non-performing assets (NPA) in the banking sector. The COVID-19 pandemic exacerbated the financial distress in the Indian corporate sector, particularly in the contact-intensive sectors like services, and micro and small businesses. However, alongside an agile fiscal-policy response, the Reserve Bank of India (RBI) unleashed a series of conventional and unconventional measures, thus softening the blow of the pandemic on the Indian economy. These measures included the provision of large liquidity injections at system-wide as well as targeted levels; asset classification standstill; easing of working capital financing and deferment of interest; moratorium on loan repayment; restructuring of advances to micro, small, and medium enterprises (MSMEs); relaxation in group exposure norms and the liquidity coverage ratio (LCR) requirements, etc. Policy measures were found to have played an important role in supporting corporate liquidity and mitigating COVID-19- related stress (Gornicka et al 2021). The global financial crisis (GFC) hit emerging economies like India through a sudden stop of capital flows combined with a collapse of domestic as well as external demand. In contrast, the impact of COVID-19 was heterogeneous across the sectors as easy liquidity conditions and easy access to credit helped some firms to sail through the revenue shock from the pandemic, while some firms were more resourceful in finding new sources of revenues or reinventing their business, for example, moving their sales online, switching to different products or adapting to work-from-home. In this article, we study the evolution of the financial health of Indias corporate sector prior to as well as during the COVID-19 pandemic and identify the most stressed sectors using balance sheet information; majorly focusing on indicators of profitability, leverage, debt repayment capacity and liquidity.

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Published On : 20th Jan, 2024

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