IVRCL is an Excellent Example of All That is Wrong with Many Indian Corporates


Last week, a portion of a flyover being built in an old part of Kolkata collapsed, killing 27 people. The flyover was being built by IVRCL.

The company reacted immediately to the tragedy. AGK Murthy, director (operations) of the company told The Hindu: “It is for the first time in the history of the company that such an incident has occurred. We are unable to comprehend at this stage what could have happened. It is beyond our thinking. It is like an act of god.”

An act of god is basically a legal term associated with events outside human control. Natural disasters like floods, earthquakes, cyclones etc., are a good example.

Hence, the question is can the collapse of the part of the flyover in Kolkata be called an act of god? The flyover clearly did not fall because of a natural disaster. Experts, who understand such things, are of the opinion that it was a design failure that caused the fall. Several experts told this to The Hindustan Times.

Also, much of the analysis on the issue in the media has missed out on the poor financials of IVRCL. The financial situation of the company has deteriorated considerably over the years. A few graphs that follow clearly show us that.


Let’s start with the debt to equity ratio of IVRCL. As can be seen from the above chart, the debt to equity ratio of the company has been on its way up from March 2007 onwards. In fact, as of March 31, 2015, the debt to equity ratio of the company stood at 12.1. Hence, the total debt of the company was more than 12 times its shareholders’ equity or networth.

What does this mean? This means that the borrowings of the company were more than 12 times its capital (or its own money or the skin in the game) in the business. The ratio is extremely high. In the normal scheme of things, lower the debt to equity ratio of a company, the better it is placed from a risk perspective. Its chances of being able to continue to pay the interest on the debt are higher.

The question to ask is how did the company reach this stage?

A simple explanation for this lies in the fact that the company borrowed big-time to expand. But this expansion did not generate an adequate amount of sales. Take a look at the following chart. The sales of the company have fallen over the years.


In fact, the total sales of the company have been falling over the last few years. On March 31, 2015, the total sales stood at Rs 3,927 crore or around half of where it stood as on March 31, 2012.

Now take a look at the following chart. The blue dots represent the sales of the company and the orange dots the total debt. As the debt of the company went up, the sales also went up, until they started falling.

Falling sales, led to a fall in the net profit of the company. This happened because the debt that the company had taken on still needed to be serviced. The interest on the debt had to be paid. As the interest of debt kept mounting up (the orange dots in the following chart), the net profit of the company kept falling (the blue dots in the following charts). In fact, the company has been loss making over the last few years. For the year ending March 31, 2015, the company made a loss of Rs 1,568 crore.


Further, the company continues to make losses. During the period April 1, 2015 to December 31, 2015, the company made losses of Rs 797 crore.

As the total borrowings of the company went up, its sales went down. The idea behind borrowing, should have been to expand the business of the company, so as to increase sales as well as profit. The increased sales would have then allowed the company to pay the higher interest on the debt. The higher profit would have added to the higher networth or shareholders’ equity.

The profit after paying dividend (if any) is retained by a company and is added to its networth or shareholders’ equity. Hence, as the profit of IVRCL would have gone up, its networth would have gone up as well. This would have kept the debt to equity ratio of the company under control as well.

But this is how things should have played out theoretically. The fact of the matter is that they did not. In fact, the losses made by the company over the last few years have been adjusted against the networth and the networth has come down dramatically during the period.

It also needs to be pointed out here that IVRCL, like many other companies, got carried away in the era of easy money that prevailed between 2002 and 2008, and ended up borrowing much more than it could perhaps be able to repay.

Take a look at the following graph which charts the rate of interest that IVRCL has paid on its debt over the years. The rate of interest that the company paid on its debt in the financial year ending March 31, 2006, stood at 4.85%. This low rate of interest encouraged the company to increase its borrowing at a rapid pace.


As on March 31, 2005, the total debt of the company had stood at Rs 336 crore. By March 31, 2012, this had jumped up nearly 18 times to Rs 6,005 crore. Like many other infrastructure companies, IVRCL also had tried to cash in on an era of easy money and is now paying for the same.

In fact, on this and other counts, many other corporates are facing a similar set of problems because of having borrowed too much during the go-go years.

It is worth asking here that how could a state government allow a company with a debt to equity ratio of 12:1 to continue building a flyover? Any company in such a scenario would be really tempted to compromise on quality, in order to ensure that it could push up its profits and if not that, at least limit its losses.

IVRCL has said that “all necessary processes and quality steps have been taken as per standard operating procedure”. This needs to properly investigated.

The column originally appeared on Vivek Kaul’s Diary on April 5, 2016

The Moral Hazard of Settling with Vijay Mallya


I’m gonna make him an offer he can’t refuse. Okay? I want you to leave it all to me. Go on, go back to the party. – Don Corleone in The Godfather

Vijay Mallya has made an offer to banks to settle the Rs 9,091 crore that he owes them. He has promised to pay Rs 4000 crore by September 2016. He has also promised to pay Rs 2,000 crore if wins a case against a company, which allegedly supplied defective engines to the now defunct Kingfisher Airlines.

Has Mallya made an offer which the banks should not refuse? Many analysts and experts seem to be of the opinion that banks should take on this offer and in the process limit their losses.  Parag Jariwala, vice-president at Religare Capital Markets told the Mint newspaper thatMallya’s settlement offer to banks is not too bad…The actual loss if banks accept Mallya’s proposal will be just 7% on principal.”

Over the last couple of days many people on Twitter have told me that “something is better than nothing’’ and given this banks should accept Mallya’s proposal and limit their losses. Honestly, this is a very simplistic way of looking at things. It would have perhaps made some sense if Mallya was the only or perhaps one of the few defaulters in town. But that is not the case.

Mallya owes Indian banks around Rs 9,091 crore. This is a very small amount when we look at the total amount of money owed by various corporates to Indian banks. The minister of state for finance Jayant Sinha shared some interesting data in a written reply to a question in the Lok Sabha, on March 11, 2016.

The accompanying table shows us how big the problem of banks’ lending to corporates actually is.

Rs. in Crore
Corporate Lending
YearGross AdvancesGross NPAsGNPA Ratio
2015-16 (till Dec. 15)38,41,8362,60,6536.78


The gross non-performing ratio has more than doubled between 2012-2013 and December 15, 2015. It has jumped from 3.22% to 6.78%. The gross non-performing ratio is essentially obtained by dividing gross non-performing assets by gross advances or total loans given by the banks, in this case to corporates.
And how do we define gross non-performing assets? As the per the Reserve Bank of India: “An asset…becomes non performing when it ceases to generate income for the bank.” When the corporate borrower stops paying interest and repaying the principal on a loan (a loan is an asset for a bank), the bank typically allows for a grace period of 90 days. After this grace period is over, the bank categorises the loans as a non-performing asset and starts setting aside money (or making provisions) for it. The total sum of such loans forms the gross-non-performing assets or bad loans.

If we look at total bad loans of Rs 2,60,653 crore, Mallya’s loans of Rs 9,091 crore form only 3.5% of the total bad loans. If the banks decide to settle with Mallya, they will end up setting a precedent. Then other defaulters will also want to settle and not pay up what they owe to the banks. Do they banks really want to end up in such a situation?

While settling with Mallya may not hurt banks financially much, the same cannot be said of a scenario where they were to start settling the Rs 2,60,553 crore corporate bad loans in total.

Also, any such settlement will build in “moral hazard” into the financial system. And what is moral hazard? As Mohamed A El-Erian writes in The Only Game in Town: “[It] is the inclination to take more risk because of the perceived backing of an effective and decisive insurance mechanism.”

If the banks start settling with corporates what is the signal that they are sending to the future corporate borrowers? That it is okay to take on a lot of risk with the money that they borrow from the bank or simply siphon it off. And if things go wrong, they can always settle with the bank for a lower amount.

Hence, it is very important that such a wrong precedent is not set.

On a different note, Mallya’s offer raises several other questions. If he is in a position to pay Rs 4,000 crore to banks why did he leave the country? Or why did he not pay the salaries of the employees of Kingfisher Airlines and leave them in a lurch?

Or does all this tell us that the former king of good times is simply buying time? On that your guess is as good as mine.

The column originally appeared in the Vivek Kaul Diary on April 4, 2016

Deposit Growth at a 53-Year Low: Are Banks in a Position to Cut Interest Rates?


The Reserve Bank of India’s first monetary policy statement for the financial year 2016-2017 is scheduled to be released on April 5, 2016. Given this, it is not surprising that demands for a cut in the repo rate are being made. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark for the short and medium term interest rates in the economy.

Economists and analysts expect the Reserve Bank of India(RBI) will to cut the repo rate by 25 to 50 basis points. With this cut, it is hoped that banks will cut their lending rates as well. As banks cut the interest rates on their loans, people will borrow and spend more. As people borrow and spend more, by buying more cars, more homes, more consumer durables and more two-wheelers, companies will benefit.

This will help economic growth. Low interest rates will also help companies which have huge debts to service. In short, this is Economics 101.

The trouble is that this Economics 101 works with the assumption that if the RBI cuts the repo rate, banks will cut their lending rates as well at the same pace. The question is will this happen? The past experience shows that the direct correlation between RBI cutting the repo rate and banks passing on that cut at the same rate in the form of lower lending rates, is rather weak.

As Crisil Research had pointed out in a report released in February 2015: “Lending rates show upward flexibility during monetary tightening but downward rigidity during easing. Between 2002 and 2004, while the policy rate declined by 200 basis points, lending rates dropped by just 90-100 basis points. Conversely, in 2011-12, when the policy rate rose by 170 basis points, lending rates surged 150 basis points.

The RBI governor Raghuram Rajan had made a similar point in December 2015 when he had said: Since the rate reduction cycle that commenced in January [2015], less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks. The median base lending rate has declined only by 60 basis points.”

The point being that when the repo rate goes up, the banks are fast to pass on the hike to the end consumers, in the form of higher lending rates. But the vice versa does not seem to be true. Why is that? A simple answer is greed or the need to make more money. Further, the trouble this time around is that public sector banks are staring at a huge amount of corporate bad loans.

In order to handle this, banks are hoping to make a greater profit by cutting their deposit rates, but not cutting their lending rates at the same rate. Nevertheless, this is just a part of the problem.

Latest data released by the RBI shows that deposit growth has slowed down tremendously. Deposit growth in 2015-2016 (actually between March 20, 2015 and March 18, 2016) came in at 9.9%. The Mint newspaper reports that this is the lowest since 1962-1963. Back then, the growth in deposits had stood at 6.5%.

I couldn’t independently verify this. Nevertheless, RBI’s Handbook of Indian Statistics has data for deposits with scheduled commercial banks from 1976-1977. This data clearly shows that the deposit growth in 2015-2016 has been the slowest in all these years. At 9.9% it is even slower than the deposit growth in 2014-2015, which was at 10.7%.

The deposit growth during 2011-2012, 2012-2013 and 2013-2014 had stood at 11.75%, 14% and 14.29% respectively.

So what does this mean? Banks make loans from deposits which they are able to raise. And if the deposit growth is almost at an all-time low, their ability to cut interest rates on their loans, will be limited. If banks cut deposit rates any further, the deposit growth will fall further and this will hurt their ability to give out loans.

There is another data point that needs to be looked at here—the incremental credit deposit ratio. This ratio is obtained by dividing the total loans given out by banks in the last one year by the total deposits raised by banks during the same period.

The incremental credit deposit ratio as on March 4, 2016, (the credit data as on March 18, 2016, is still not available), stood at 83.5%. This means that for every Rs 100 raised by banks as deposits, they lent out Rs 83.5.

It needs to be mentioned here that for every Rs 100 banks raise as deposits, they need to maintain Rs 4 with the RBI as a cash reserve ratio(CRR). Further, they need to invest Rs 21.5 into government bonds in order to maintain the statutory liquidity ratio(SLR). This leaves banks with Rs 74.5 to lend out of every Rs 100 that they raise as deposits.

The fact is that they have lent Rs 83.5 during the last one year. This has been possible because of the fact that the incremental credit deposit ratio between March 2014 and March 2015 had been at 68.7%. The low number gave banks scope to lend more in 2015-2016.

The point is that if the loan growth does pick up a little more from here, the incremental credit deposit ratio is likely to get worse in the days to come. If we take this possibility into account, banks will have a tough time cutting down their deposit rates any further. And that being the case, the chances of lending rates being cut further are limited.

But this is something that those demanding interest rate cuts all the time, are not in a position to understand.

The column originally appeared in Vivek Kaul’s Diary on April 1, 2016