Impact of Liberalisation on Corporate Sector Financing

 Performance of public and private sector

companies in post liberalisation period drive

 Capital market objectives of Indian libralisation  Financing pattern of non-fianncial Indian

corporations in pre and post liberalisation eras liberalisation period

 Performance of Indian stock markets in post Special situation of SME sector

 Growth of private sector companies has far exceeded public sector

companies in important dimensions in the post-liberalisation period:

Private Number of units: CAGR 1993-02 Paid-up capital: CAGR 1993-02 Share of paid-up capital 1993 Share of paid-up capital 2002 Share of GDP 2002 Share of GDI 2002 7.9% 23.8% 35.2% 71.6% 75.9% 73.9% Public 0.6% 6.2% 64.8% 28.4% 24.1% 26.1%

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

 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

 Besides, the bigger companies in the private

sector have grown much faster than smaller companies in all important respects, including sales, profits, and assets.

 SEBI s 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

Type of funding 89-92

 Internal sources
 External sources
Capital markets 17.8% Banks and other financial 22.1% institutions Other sources (including 27.8% trade credit and provisions)

92-04
33.3%
21.9% 18.2% 25.9%

32.2.%

 Note: the numbers for both periods are averages across the years

 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.

 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).

 A dollar invested in the BSE index during 1992-05

would 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 BSE

index was 55% of GDP (3.5% in early 80 s). companies in the world: well over 10,000.

 India boasts the largest number of listed

 All of this has captured popular press as well as

public forums, somewhat to the neglect of corporate financing

 The banking sector in India has grown

steadily in size (total deposits) at a fairly uniform annual rate of 18% since the 1980 s.
 With deposits of over $385 billion dollars in

2003, the sector accounted for 75% of the country s financial assets.
 The NPL problem is not serious: could be

partly due to under-lending

 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

 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

 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

 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 90 s

 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

 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

 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.

 Thank You