The Reserve Bank of India (RBI) has categorised loans of 283 manufacturing companies worth Rs 210,400 crore as vulnerable and “debt at risk”, indicating a worsening of the risk profile in the sector. Of this, there are 43 vulnerable steel companies with debt at risk of Rs 118,200 crore, which the RBI said was “alarming” according to an study by the Indian central bank.The number of vulnerable manufacturing companies rose continuously between 2012-13 to 2015-16 — from 215 to 283. The debt held by these companies — debt at risk — exhibited an increasing trend over the last five years with significant jump in 2014-15, said an RBI study on the private corporate business sector. The debt at risk of manufacturing companies jumped from Rs 58,800 crore in 2011-12 to Rs 210,400 crore in 2015-16, a jump of 258 per cent in the last four years.

The number of vulnerable manufacturing companies rose continuously between 2012-13 to 2015-16 — from 215 to 283. The debt held by these companies — debt at risk — exhibited an increasing trend over the last five years with significant jump in 2014-15, said an RBI study on the private corporate business sector. The debt at risk of manufacturing companies jumped from Rs 58,800 crore in 2011-12 to Rs 210,400 crore in 2015-16, a jump of 258 per cent in the last four years.

The annual financial statements of 1,707 common manufacturing companies over the last five years were analysed by the RBI to study the trends in debt held by the vulnerable set of companies — those companies having a debt-equity ratio higher than 200 per cent and an interest coverage ratio of less than one. Companies having negative net worth were also considered as vulnerable.The share of ‘debt at risk’ in the total debt of 1,707 companies grew and stood at around 30 per cent in the last two years, which indicated a deterioration in the risk profile of the manufacturing sector in recent years, the RBI said. The share was just 11.9 per cent in 2011-12. Many of the loans turned non-performing assets (NPAs) in the last two years.

The share of ‘debt at risk’ in the total debt of 1,707 companies grew and stood at around 30 per cent in the last two years, which indicated a deterioration in the risk profile of the manufacturing sector in recent years, the RBI said. The share was just 11.9 per cent in 2011-12. Many of the loans turned non-performing assets (NPAs) in the last two years.

The RBI says the risk profile of the iron and steel companies was more alarming with its share of ‘debt at risk’ in the total debt of 142 companies at around 58.7 per cent in 2015-16. The deterioration in the steel segment was fast and furious, as a banker put it. From just Rs 20,200 crore (16.5 per cent of total debt) in 2011-12, the risky debt has zoomed to Rs 1,18,200 crore. Excluding iron and steel companies, there was an improvement in the risk profile of the remaining companies with the share of ‘debt at risk’ in the total debt of 1,565 companies at 18.8 per cent in 2015-16, the RBI said.

The RBI has told banks to clean up their books by March 2017 by recognising stressed assets and making adequate provisions.According to the RBI report, the sources of funds raised by these companies revealed that the share of external sources (other than share capital and accumulated surplus) increased in 2015-16 compared with the previous year, while in terms of absolute amount, both the sources declined in the last two years. “Long-term borrowings, which was a major source of fund until 2014-15, turned negative indicating the deleveraging process undertaken by the manufacturing sector in 2015-16. Similarly, the fund available through trade credit also declined in the last two years. The uses of funds table revealed that while gross fixed assets formation did not improve much in 2015-16, more money was invested in non-current assets. Drawdown of inventory position was another salient feature of the uses of funds by the manufacturing companies,” the RBI said.

According to the RBI report, the sources of funds raised by these companies revealed that the share of external sources (other than share capital and accumulated surplus) increased in 2015-16 compared with the previous year, while in terms of absolute amount, both the sources declined in the last two years. “Long-term borrowings, which was a major source of fund until 2014-15, turned negative indicating the deleveraging process undertaken by the manufacturing sector in 2015-16. Similarly, the fund available through trade credit also declined in the last two years. The uses of funds table revealed that while gross fixed assets formation did not improve much in 2015-16, more money was invested in non-current assets. Drawdown of inventory position was another salient feature of the uses of funds by the manufacturing companies,” the RBI said.Among the major industries in the basic goods sector, sales growth declined for the cement & cement products industry. The significant recovery that was observed in 2014-15 could not be sustained in 2015-16. Operating profit margins remained at similar levels in the last two years and was significantly below the levels observed in 2009-10. The iron and steel industry was heavily impacted by contraction in output prices and its sales declined by 10.2 per cent. The operating profit margin also declined to a seven-year low level of 11.0 per cent. Interest coverage ratio of this industry declined below one, while its ‘debt at risk’ increased by 18.3 per cent in 2015-16 compared with the previous year. For both cement & cement products and iron & steel industries, net cash outflows for investing activities declined in 2015-16.

Among the major industries in the basic goods sector, sales growth declined for the cement & cement products industry. The significant recovery that was observed in 2014-15 could not be sustained in 2015-16. Operating profit margins remained at similar levels in the last two years and was significantly below the levels observed in 2009-10. The iron and steel industry was heavily impacted by contraction in output prices and its sales declined by 10.2 per cent. The operating profit margin also declined to a seven-year low level of 11.0 per cent. Interest coverage ratio of this industry declined below one, while its ‘debt at risk’ increased by 18.3 per cent in 2015-16 compared with the previous year. For both cement & cement products and iron & steel industries, net cash outflows for investing activities declined in 2015-16.However, interest expenses of the manufacturing sector contracted for the second successive quarter in Q4 of 2015-16, while it increased markedly for the non-IT service sector. This was mainly on account of large borrowings undertaken by the telecommunication industry. IT sector witnessed noticeable improvement recording the highest growth in sales, operating profits and net profit in Q4 of 2015-16 over the last six quarters.

However, interest expenses of the manufacturing sector contracted for the second successive quarter in Q4 of 2015-16, while it increased markedly for the non-IT service sector. This was mainly on account of large borrowings undertaken by the telecommunication industry. IT sector witnessed noticeable improvement recording the highest growth in sales, operating profits and net profit in Q4 of 2015-16 over the last six quarters.