Honestly, I can’t take personal credit for the pathbreaking guru-speak that you must have witnessed in this editorial’s heading – “Cash is king, hold on to it.” From management writers like Ramcharan to top of the lot financial practitioners like V. Balakrishnan of Infosys, maintaining of what I term ‘superhealthy’ cash reserves has been encouraged to no ends, especially in times of economic slowdown. Of course, there’s a double whammy hidden within this that even the likes of Dinesh Trivedi can easily forecast – and that is that when savings, especially cash holdings, go up, investments and consumption automatically reduce. And this leads to a further spiral down for economic growth, with a lovely backhanded slap of an El Dorado waiting at the end of the rainbow – an economic deflation cycle. And unfortunately, the way events are unfolding in the global financial system, this fear is not without sound logic. With the eurozone crisis worsening by the day with no respite whatsoever in sight, corporate India – like me – could well have started believing that the ongoing meltdown will snowball into a full fledged crisis and will continue till the end of 2012, if not any further.
But honestly again, the current scenario is quite paradoxical. By no means are Indian companies cash strapped to such an extent that they need to hoard up superhealthy cash reserves, more so when we are talking about the top 500 (BSE 500 constituents). But that’s exactly what they have been doing and were doing even during the last financial year. As their balance sheets suggested, by March 2011, the BSE 500 constituent companies had piled up a mammoth cash and bank balance of $96 billion (Rs.4.88 trillion at current conversion rate). This figure has only grown till date. At the same time, India Inc is apparently facing a liquidity crunch, which is severer than the situation in 2008; at least 45% of corporate India believes that way as per a recent FICCI report. Raison d’être: In the wake of the global crisis, trade credits have been curtailed, external commercial borrowings are hard to avail, not much money is present in the primary market, PE investors are either weary to invest under the present economic scenario or are waiting like vultures for the right time, and the last but not the least, the domestic banking sector has become very selective in lending, to safeguard their own asset quality.
If that was not enough, input costs have skyrocketed over the past year and companies have not succeeded in passing on the full burden to consumers at all stages resulting in squeezed margins (negative growth of 14% year-on-year in BSE 500 PAT for the 9-months ended December 2011). As a result, no one wants to part away with their cash balance at present. So much so that 50% of the respondents (82% of which were large corporate entities) interviewed in the FICCI survey said they were planning to hold on to their cash balances at least for another six months.
Without doubt, our economic growth is slowing down due to this double trouble of banks reducing lending to protect themselves, and large corporations postponing investments and consumption to a later date. So should the companies change track? The answer is no, not at all. Why should a profit motive driven company suddenly feel the need to be patriotic and free up its cash reserves? This might sound weirdly un-nationalistic, but a company’s primary responsibility lies towards its shareholders, not towards the nation. It’s the government’s job, and not that of privately run companies, to ensure more liquidity in the market. If the banks have become subdued (lending to industries by scheduled commercial banks have fallen from 25.9% in March 2011 to 22.1% in November 2011), then alternative fronts like NBFCs must open up to ensure that lending to industries is not hampered. And that is the crux of this issue’s cover story, which presents a hypothesis that there is no time better than now to promote NBFCs. So here goes my guruspeak again: “Cash is King, hold on to it... and pray the government gets it right this time.”
But honestly again, the current scenario is quite paradoxical. By no means are Indian companies cash strapped to such an extent that they need to hoard up superhealthy cash reserves, more so when we are talking about the top 500 (BSE 500 constituents). But that’s exactly what they have been doing and were doing even during the last financial year. As their balance sheets suggested, by March 2011, the BSE 500 constituent companies had piled up a mammoth cash and bank balance of $96 billion (Rs.4.88 trillion at current conversion rate). This figure has only grown till date. At the same time, India Inc is apparently facing a liquidity crunch, which is severer than the situation in 2008; at least 45% of corporate India believes that way as per a recent FICCI report. Raison d’être: In the wake of the global crisis, trade credits have been curtailed, external commercial borrowings are hard to avail, not much money is present in the primary market, PE investors are either weary to invest under the present economic scenario or are waiting like vultures for the right time, and the last but not the least, the domestic banking sector has become very selective in lending, to safeguard their own asset quality.
If that was not enough, input costs have skyrocketed over the past year and companies have not succeeded in passing on the full burden to consumers at all stages resulting in squeezed margins (negative growth of 14% year-on-year in BSE 500 PAT for the 9-months ended December 2011). As a result, no one wants to part away with their cash balance at present. So much so that 50% of the respondents (82% of which were large corporate entities) interviewed in the FICCI survey said they were planning to hold on to their cash balances at least for another six months.
Without doubt, our economic growth is slowing down due to this double trouble of banks reducing lending to protect themselves, and large corporations postponing investments and consumption to a later date. So should the companies change track? The answer is no, not at all. Why should a profit motive driven company suddenly feel the need to be patriotic and free up its cash reserves? This might sound weirdly un-nationalistic, but a company’s primary responsibility lies towards its shareholders, not towards the nation. It’s the government’s job, and not that of privately run companies, to ensure more liquidity in the market. If the banks have become subdued (lending to industries by scheduled commercial banks have fallen from 25.9% in March 2011 to 22.1% in November 2011), then alternative fronts like NBFCs must open up to ensure that lending to industries is not hampered. And that is the crux of this issue’s cover story, which presents a hypothesis that there is no time better than now to promote NBFCs. So here goes my guruspeak again: “Cash is King, hold on to it... and pray the government gets it right this time.”
