presentation impact of economic liberal is at ion on indian248

8/3/2019 Presentation Impact of Economic Liberal is at Ion on Indian248

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Presentation

Impact of Economic Liberalisation onIndian Corporate Sector Financing?

by Sankar DeCentre for Analytical Finance, ISB

Conference on

Indian Economic Reforms: Current StatusDecember 19, 2005

ISB campus


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Sankar De Indian Economic Sector Reforms Conference

Outline

Performance of public and private sectorcompanies in post liberalisation period

Capital market objectives of Indianlibralisation drive

Financing pattern of non-fianncial Indiancorporations in preand postliberalisationeras

Performance of Indian stock markets in post-

liberalisation period

Special situation of SME sector


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Performance of private & publicsectors post-liberalisation

Growth of private sector companies has far exceededpublic sector companies in important dimensions inthe 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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-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

1993-94 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

Year

Yeartoyeargrowth

Government Companies

Non-Government

Companies

Fig. 1.A : Annual growth innumber of companies

Source: Central Statistical Organization, National Accounts Statistics


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0

50000

100000

150000

200000

250000

300000

1993 1994 1995 1996 1997 1998 1999 2000* 2001* 2002*

Year

Rupeescrores


Non-Government Companies

Fig. 1.B : Paid-up Capital



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0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

1993 1994 1995 1996 1997 1998 1999 2000* 2001* 2002*

Year

Rupeescrores


Non-Government

Companies

Fig. 1.C : Contribution to GDP



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0

50000

100000

150000

200000

250000

300000

350000

400000

1993 1994 1995 1996 1997 1998 1999 2000* 2001* 2002*

Year

Rupeescro

res


Non-Government Companies

Fig. 1.D : Gross Domestic Investments





However, the performance of private sectorcompanies post liberalisation has not beenan unmixed success.

The growth rate of private sector companiesdecelerated during 1996-97 through 2002-3. Ithas picked up again only recently.



19.0%

15.4%

20.5%

10.4%

6.1%

-1.3%

22.2%

3.7%

22.5%

31.0%

-3.2%

9.0%

5.8%

3.0%

12.1%

7.5%

11.2%

8.5%9.9%

23.7%

7.8%

-2.8%-1.9%

31.7%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

Year

GrowthRa

te

Sales Gross Profits

Fig. 2: Growth rates in sales andprofits of private sector companies

Source: RBI Bulletin, November 2005




Besides, the bigger companies in the privatesector have grown much faster than smaller

companies in all important respects, includingsales, profits, and assets.



0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Sales Gross Profits Bank Borrowings Gross Fixed

Assets

Inventories Total Net Assets

Indicators

AvgAnnualGrowthRa

te(%

Below Rs. 1 crore

Rs. 1 crore - Rs. 5 crore

Rs. 5 crore - Rs. 25 crore

Rs. 25 crore and above

Fig. 3: Average annual growth ratesin size groups

Source: RBI Bulletin, November 2005



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 ofFinance The corporate sector will have to be encouraged to

raise resources increasingly from the market

Capital market objectivesof liberalisation

Fi i f fi i l



Financing pattern of non-financialcompanies 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

Fi i f fi i l



Financing pattern of non-financialcompanies in private sector

Financing pattern of private sector companiesappears to have changed little over the firstten years of liberalisation.

Proportion of funds raised from the marketincreased only marginally.

Almost to the same extent, the proportion of

funds raised from banks/FIs declined.

Actually, the financial institutions themselvesabsorbed capital market financing.



0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Internal Sources Capital markets Banks / Financial

Institutions

Group Companies /

Promoters / Directors

Others (including

current liabilities &

provisions)

Source

Contributio

n

1989-90 to 1991-92

1992-93 to 2003-04

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

Source: Centre for Monitoring Indian Economy (CMIE)

St k k t f



Stock market performancesince liberalisation

Interestingly, though Indian capital marketshave not become more important as a primarysource of funds for the private sector, over thesame 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).



Table 1: Largest stock marketsin the world

Rank Stock Market Total Market Cap(US$ billion)

Concentration(%)

Turnover Velocity(%)

1 NYSE 12,707,578.3 55.8 89.8

2 Tokyo SE 3,557,674.4 56.9 97.1

3 Nasdaq 3,532,912.0 59.3 249.5*

4 London SE 2,865,243.2 82.2 116.6

5 Euronext 2,441,261.4 68.8 115.0

6 Osaka SE 2,287,047.8 56.7 5.9

7 Deutsche Brse 1,194,516.8 73.2 67.9

8 TSX Group 1,177,517.6 63.1 66.2

9 BME Spanish Exchanges 940,672.9 NA 57.7

10 Hong Kong Exchanges 861,462.9 78.6 39.7

11 Swiss Exchange 826,040.8 76.0 100.5

12 Borsa Italiana 789,562.6 61.9 134.9

13 Australian SE 776,402.8 79.8 81.1

14 India (BSE+NSE) 749,597.1 78.4 70.9

15 China (Shanghai+Shenzen) 447,720.3 40.5 97.0

St k k t f



Stock market performancesince liberalisation

A dollar invested in the BSE index during1992-05 would have earned a higher (buy andhold) return than the S&P 500 and the indicesin UK, China, and Japan.

At the end of March 2005, market cap of BSEindex was 55% of GDP (3.5% in early 80s).

India boasts the largest number of listedcompanies in the world: well over 10,000.

All of this has captured popular press as wellas public forums, somewhat to the neglect ofcorporate financing.

Fi 5 R t St k I d



Return on Stock Indexes around the World

0

1

2

3

4

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Value

of$1investment,($)

SBE-India

SSE-China

S&P 500

FTSE-London

Nikkei -Japan

Fig. 5: Return on Stock Indexesaround the World

Banks and financial institutions



Banks and financial institutionsas a financing source

The banking sector in India has grown steadilyin size (total deposits) at a fairly uniformannual rate of 18% since the 1980s.

With deposits of over $385 billion dollars in2003, the sector accounted for 75% of thecountrys financial assets.

The NPL problem is not serious: could be

partly due to under-lending.

Banks and financial institutions


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Banks and financial institutionsas a financing source

On the other hand, the proportion of fundsprovided by banks and financial institutionsactually declined for private sector companiesover 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 ingovernment 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 theother day.

Lack of right incentives for public sectorbankers 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 sinceliberalisation

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 industrialproduction as a whole in the 90s

Fig 6: Growth of the SME sector


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Growth of the SME sector in India

0

5

10

15

20

25

1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

Years

UnitsandEmployment(millions)

0

20

40

60

80

100

120

140

160

180

200

Output(billionsofUSD)

Units

Employment

Production

Source: CII website

Fig. 6: Growth of the SME sectorin India

Figure 7 : Growth rates of the SME


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Growth Rates of the SME sector and Industrial Production

0

2

4

6

8

10

12

14

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

Years

AnnualGrowthRates(%

)

SSI Sector

Industrial Sector

Source: CII website

Figure 7 : Growth rates of the SMEsector 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 inplant and machinery

Small Scale Service and Business Enterprises(SSSBE): less than Rs. 10 lakh in plant andmachinery

SME sector is important in other high-growtheconomies as well: importance hardly uniqueto 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

Survey findings of SSI units


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Survey findings of SSI unitsin Hyderabad

The findings of a survey of SSI units in Hyderabad( inAllen, Chakrabarti, De, and Qian; 2005) indicate that

During the start-up phase, friends and family comprise themost important (over 50%) source of financing for anoverwhelming majority of respondents (70%)

During the growth phase too, friends and family remain thebest 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 avoidsindependent scrutiny on the one hand and limitsgrowth on the other.


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Fig 7 B : Ease of obtaining funds


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Fig. 7.B : Ease of obtaining fundsduring growth stage

Ease of obtaining funds during growth stage

0%

10%

20%

30%

40%

50%

60%

70%

80%

Family andclose friends

Short-termbank loans

Long-termbank loans

Loans fromspecial

institutionssuch as

SIDBI andSFCs

Trade credits Privateequity/debt

frominvestors

within India

NRIInvestments

Foreign directinvestment(non-NRI)

Issue publicstock and

bonds in thestock markets

Years

Percentage

ofrespond

ents

Very easy and low cost

Relatively easy and moderate costs

Difficult and costly

Extremely difficult and costly


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Concluding observations

Capital markets financing has become onlymarginally more important.

Financing from the banking sector actuallydeclined 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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Q&A


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Thank You

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