Presentation

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Presentation Impact of Economic Liberalisation on
Indian Corporate Sector Financing? by Sankar
De Centre for Analytical Finance, ISB
Conference on Indian Economic Reforms Current
Status December 19, 2005 ISB campus
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Outline

• Performance of public and private sector
  companies in post liberalisation period
• Capital market objectives of Indian libralisation
  drive
• Financing pattern of non-fianncial Indian
  corporations in pre- and post-liberalisation eras
• Performance of Indian stock markets in
  post-liberalisation period
• Special situation of SME sector

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Performance of private public sectors
post-liberalisation

• Growth of private sector companies has far
  exceeded public sector companies in important
  dimensions in the post-liberalisation period
• Private Public
• Number of units CAGR 1993-02 7.9 0.6
• Paid-up capital CAGR 1993-02 23.8 6.2
• Share of paid-up capital 1993 35.2 64.8
• Share of paid-up capital 2002 71.6 28.4
• Share of GDP 2002 75.9 24.1
• Share of GDI 2002 73.9 26.1
• A lot of this is due to privatisation drive
  post-liberalization.

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Fig. 1.A Annual growth in number of companies
Source Central Statistical Organization,
National Accounts Statistics
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Fig. 1.B Paid-up Capital

Source Central Statistical Organization,
National Accounts Statistics
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Fig. 1.C Contribution to GDP
Source Central Statistical Organization,
National Accounts Statistics
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Fig. 1.D Gross Domestic Investments
Source Central Statistical Organization,
National Accounts Statistics
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Performance of private public sectors
post-liberalisation

• However, the performance of private sector
  companies post liberalisation has not been an
  unmixed success.
• The growth rate of private sector companies
  decelerated during 1996-97 through 2002-3. It
  has picked up again only recently.

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Fig. 2 Growth rates in sales and profits of
private sector companies

Source RBI Bulletin, November 2005
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Performance of private public sectors
post-liberalisation

• Besides, the bigger companies in the private
  sector have grown much faster than smaller
  companies in all important respects, including
  sales, profits, and assets.

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Fig. 3 Average annual growth rates in size groups
Source RBI Bulletin, November 2005
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Capital market objectives of liberalisation

• SEBIs capital market objectives
• promote, develop, and regulate the securities
  market by such measures as it thinks fit (SEBI
  Act 92/00, chapter IV)
• Pre-budget Economic Survey (93), Ministry of
  Finance
• The corporate sector will have to be encouraged
  to raise resources increasingly from the market

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Financing pattern of non-financial companies in
private sector

• Type of funding 89-92 92-04
• Internal sources 32.2. 33.3
• External sources
• Capital markets 17.8 21.9
• Banks and other financial 22.1 18.2
• institutions
• Other sources (including 27.8 25.9
• trade credit and provisions)
• Note the numbers for both periods are averages
  across the years

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Financing pattern of non-financial companies in
private sector

• Financing pattern of private sector companies
  appears to have changed little over the first ten
  years of liberalisation.
• Proportion of funds raised from the market
  increased only marginally.
• Almost to the same extent, the proportion of
  funds raised from banks/FIs declined.
• Actually, the financial institutions themselves
  absorbed capital market financing.

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Fig. 4 Sources of funds for non-government
companies in India

Source Centre for Monitoring Indian Economy
(CMIE)
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Stock market performance since liberalisation

• Interestingly, though Indian capital markets have
  not become more important as a primary source of
  funds for the private sector, over the same
  period the stock markets have experienced much
  more volume of trading.
• At the end of 2004, BSE and NSE combined was the
  14th largest stock market in the world (in terms
  of total market capitalisation), significantly
  ahead of China (15th).

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Table 1 Largest stock markets in the world
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Stock market performance since liberalisation

• A dollar invested in the BSE index during 1992-05
  would have earned a higher (buy and hold) return
  than the SP 500 and the indices in UK, China,
  and Japan.
• At the end of March 2005, market cap of BSE index
  was 55 of GDP (3.5 in early 80s).
• India boasts the largest number of listed
  companies in the world well over 10,000.
• All of this has captured popular press as well as
  public forums, somewhat to the neglect of
  corporate financing.

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Fig. 5 Return on Stock Indexes around the World
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Banks and financial institutions as a financing
source

• The banking sector in India has grown steadily in
  size (total deposits) at a fairly uniform annual
  rate of 18 since the 1980s.
• With deposits of over 385 billion dollars in
  2003, the sector accounted for 75 of the
  countrys financial assets.
• The NPL problem is not serious could be partly
  due to under-lending.

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Banks and financial institutions as a financing
source

• On the other hand, the proportion of funds
  provided by banks and financial institutions
  actually declined for private sector companies
  over 1993 2002.
• There is evidence of under-lending by banks
  (Banerjee and Duflo 2002).
• While they shied away from corporate loans,
  financial institutions invested heavily in
  government and other kinds of securities.

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Reasons for under - lending

• Among may reasons cited,
• Inadequate lender protection before SARFEISI Act,
  2002. Not enforced until the other day.
• Lack of right incentives for public sector
  bankers to make risky corporate loans (Banerjee,
  Cole and Duflo 2004)

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Other sources of financing

• Mostly short-term trade credit
• Close to a third of all sources
• The second most important source (after internal
  sources) before as well as since liberalisation
• Importance increases dramatically for the small
  and medium sector (SME) sector

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The SME sector

• A very important sector of the economy accounts
  for
• 40 of value added in manufacturing
• USD 188 billion annual output (6.75 of GDP)
• 20 million employment
• 95 of total industrial units
• Managed faster growth rate than industrial
  production as a whole in the 90s

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Fig. 6 Growth of the SME sector in India
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Figure 7 Growth rates of the SME sector and
Industrial Production
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The SME sector

• No official definition of SME exists
• Two subsets of SME are
• Small Scale Industry (SSI) less than Rs. 1
  crore in plant and machinery
• Small Scale Service and Business Enterprises
  (SSSBE) less than Rs. 10 lakh in plant and
  machinery
• SME sector is important in other high-growth
  economies as well importance hardly unique to
  India

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Financing sources for SME sector

• Severely credit-constrained
• In an NSSO survey
• faced an acute shortage of capital
• mean loan outstanding was less than 3 of GFA
• 93 had no bank/FI loan outstanding
• About 50 of the loans were from SIDBI/SFCs
• Depends heavily on other sources (close to 50)
• Similar, though less extreme, situation for SMEs
  in other countries
• Anecdotal evidence indicates high bankruptcy

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Survey findings of SSI units in Hyderabad

• The findings of a survey of SSI units in
  Hyderabad( in Allen, Chakrabarti, De, and Qian
  2005) indicate that
• During the start-up phase, friends and family
  comprise the most important (over 50) source
  of financing for an overwhelming majority of
  respondents (70)
• During the growth phase too, friends and family
  remain the best source of financing for 70 of
  respondents.
• Bank financing is the second preferred source.
• Bank financing seems to be extremely
  relationship-driven. 20 respondents had no bank
  credit. 63 had credit from only one
  institution.
• Dependence on friends and family financing
  avoids independent scrutiny on the one hand and
  limits growth on the other.

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Fig. 7.A Importance of various sources of funds
at start - up
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Fig. 7.B Ease of obtaining funds during growth
stage
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Concluding observations

• Capital markets financing has become only
  marginally more important.
• Financing from the banking sector actually
  declined over 1993 2002.
• Heavy dependence on other sources
• External financing for the SME sector is scarce.
• Overall, the picture is sobering.

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• QA

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• Thank You