With subdued business activity on the horizon, financial risks to firms to remain ‘elevated’: Report

With subdued business activity on the horizon, financial risks to firms to remain ‘elevated’: Report

Amid a prolonged phase of slow growth, coupled with geopolitical uncertainty, financial risks will remain elevated for most Indian businesses for the rest of 2022, says Dun & Bradstreet (D&B), a global provider of business data and analytics.

In the run-up to the pandemic, the Indian corporate sector was already showing signs of stress, says D&B. Noting the heightened Covid-induced pressure on firms, the latest edition of the Dun & Bradstreet Global Bankruptcy report claims that bankruptcies in the country in 2020 and 2021 were comparable to the pre-pandemic year of 2018. This is despite a 6.6% decline in GDP growth from April 2020 to March 2021.

The report states that the government announced several measures to help ease the pressure on firms. These included relaxing rules on loan repayment, asset classification, restructuring of loans, credit guarantees and debt servicing. However, despite these measures, the gross non-performing assets (GNPA) ratio in the country’s banking sector remained high — 9.1% in March 2019 and 8.2% in March 2020 — and the central bank has projected it to increase to 11.5% for 2020-21 amid the pandemic, said the report. “Growth had plunged to an 11-year low at 3.7% during the fiscal year April 2019 to March 2020, which further accentuated asset quality concerns and risk aversion by banks. India witnessed a surge in bankruptcy cases in 2019, an increase by 93% on a year-on-year basis, the highest since 2016 when the Insolvency and Bankruptcy Code framework (IBC) was implemented,” it stated.

Since 2019, the world has been facing major issues like Covid-19 and the Russia-Ukraine conflict, which have led to a major economic downturn. While it has been almost two years since the outbreak of the pandemic, market conditions continue to remain volatile for most business sectors. This has had a bearing on bankruptcy cases, too.

How are Indian firms likely to fare in terms of business failures in the near future?

Arun Singh, Global Chief Economist, Dun and Bradstreet, says the prolonged geopolitical uncertainty, slowdown in growth and global monetary policy spillover effects imply that financial risks will remain elevated for most of 2022. “Bankruptcy cases are expected to increase, albeit moderately, as regulatory measures are withdrawn and the profitability of businesses comes under pressure. Multi-year high input price pressures, rising borrowing costs, along with volatility in the financial markets, will restrain the pace of business activity in India. The depreciating rupee is also adding to the landed cost and borrowing cost of firms,” Singh says, adding that there could be pockets of financial distress that would need close monitoring by tapping into various forms of alternative data and analytical insights.

Nearly half of all the 43 economies monitored by D&B saw a decrease in business failures during 2021. In some countries, business failures reached their lowest level in a decade.

Access to low-cost liquidity has been a defining characteristic of the capital markets during the pandemic. The outstanding amount of total debt securities — which includes the amount borrowed in the domestic and international markets, raised by non-financial corporations — stood at $19.05 trillion as of June 2021, according to data from the Bank for International Settlements (BIS), says D&B. This represents a 15.8% increase from March 2020, compared with a 6.2% average annual increase over the preceding five years. This has served as a lifeline for many firms that were on the brink of bankruptcy.

The D&B says that globally, governments have concentrated their efforts on MSME firms, owing to the sector’s vulnerability and critical role in creating employment opportunities. “Most Asian economies witnessed lower bankruptcies in 2020 and 2021 than in 2019. Expiry of fiscal packages for businesses, end of moratoriums on loan repayments and monetary tightening are key risks to business viability in 2022. The flood of liquidity from debt markets, massive fiscal packages, loose monetary policy, and creditors’ forbearance have suppressed bankruptcy rates in 2021.”

Central banks across the world have been equally swift in easing monetary conditions to help businesses survive the pandemic. As many as 32 of the 35 countries for which data is available have reduced their policy interest rates in response to the pandemic, the report adds.

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