Impact of Liberal is at Ion on Corporate Sector Financing

8/6/2019 Impact of Liberal is at Ion on Corporate Sector Financing

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Impact of Liberalisation onCorporate Sector Financing

Performance of public and private sectorcompanies in post liberalisation period

Capital market objectives of Indian libralisationdriveFinancing pattern of non-fianncial Indiancorporations in pre and post liberalisationeras

Performance of Indian stock markets in post-liberalisation period

Special situation of SME sector



G rowth of private sector companies has far exceeded public sectorcompanies in important dimensions in the post-liberalisation period:

Private Public N umber of units: CA GR 1993-02 7.9% 0.6% Paid-up capital: CA GR 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 GD P 2002 75.9% 24.1% Share of GD I 2002 73.9% 26.1%

A lot of this is due to privatisation drive post-liberalization.



H owever, the performance of private sectorcompanies post liberalisation has not been

an unmixed success.The growth rate of private sector companiesdecelerated during 1996-97 through 2002-3.

It has picked up again only recently



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

companies in all important respects,including sales, profits, and assets.



SEB I s capital market objectives :promote, develop, and regulate the securities

market by such measures as it thinks fit (SEB

I Act92/00, chapter IV).

Pre-budget Economic Survey (93), Ministry of Finance

The corporate sector will have to be encouragedto raise resources increasingly from the market



Type of funding 89-92 92-04Internal sources 32.2.% 33.3%

External sourcesCapital markets 17.8% 21.9%B anks 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



Financing pattern of private sector companiesappears to have changed little over the first tenyears 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.



Interestingly, though Indian capital markets havenot become more important as a primary sourceof funds for the private sector, over the sameperiod the stock markets have experiencedmuch more volume of trading.

At the end of 2004, B SE and N SE combined wasthe 14 th largest stock market in the world (interms of total market capitalisation),significantly ahead of China (15 th).



A dollar invested in the B SE index during 1992-05would have earned a higher (buy and hold)return than the S&P 500 and the indices in UK,

China, and Japan.At the end of March 2005, market cap of B SEindex was 55% of GD P (3.5% in early 80 s).

India boasts the largest number of listedcompanies in the world: well over 10,000.All of this has captured popular press as well aspublic forums, somewhat to the neglect of corporate financing



The banking sector in India has grownsteadily in size (total deposits) at a fairlyuniform annual rate of 18% since the 1980 s.

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

The N PL problem is not serious: could bepartly due to under-lending



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(B anerjee and Duflo; 2002 ).

While they shied away from corporate loans,financial institutions invested heavily ingovernment and other kinds of securities



Mostly short-term trade credit

Close to a third of all sources

The second most important source (afterinternal sources) before as well as sinceliberalisation

Importance increases dramatically for thesmall and medium sector (SME) sector



A very important sector of the economy:accounts for

40% of value added in manufacturingUSD 188 billion annual output (6.75% of GD P)

20 million employment

95% of total industrial unitsManaged faster growth rate than industrial productionas a whole in the 90 s



N o official definition of SME exists

Two subsets of SME areSmall Scale Industry (SSI): less than R s. 1 crore inplant and machinerySmall Scale Service and B usiness Enterprises (SSS B E):less than R s. 10 lakh in plant and machinery

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



Severely credit-constrained:

In an N SSO survey:faced an acute shortage of capitalmean loan outstanding was less than 3% of G FA93% had no bank/FI loan outstandingAbout 50% of the loans were from SI D B I/SFCs

D epends heavily on other sources (close to 50%)

Similar, though less extreme, situation for SMEs in othercountries

Anecdotal evidence indicates high bankruptcy



Capital markets financing has become onlymarginally more important.

Financing from the banking sector actuallydeclined over 1993 2002.

H eavy dependence on other sources

External financing for the SME sector is scarce.Overall, the picture is sobering.



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Impact of Liberal is at Ion on Corporate Sector Financing

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