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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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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
Government Companies
Non-Government Companies
Fig. 1.B : Paid-up Capital
Source: Central Statistical Organization, National Accounts Statistics
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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
Government Companies
Non-Government
Companies
Fig. 1.C : Contribution to GDP
Source: Central Statistical Organization, National Accounts Statistics
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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
Government Companies
Non-Government Companies
Fig. 1.D : Gross Domestic Investments
Source: Central Statistical Organization, National Accounts Statistics
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Performance of private & publicsectors post-liberalisation
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.
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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
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Performance of private & publicsectors post-liberalisation
Besides, the bigger companies in the privatesector have grown much faster than smaller
companies in all important respects, includingsales, profits, and assets.
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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
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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
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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
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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.
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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
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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).
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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
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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
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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
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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