Saturday, September 08, 2007

Debt vapor

Thinking of early 90’s when I had just started working….

Indian companies were then extremely under leveraged and over mortgaged. For every Rupee of debt, one had to mortgage Rs.4 worth of assets because Marked-To-Market (MTM) as a concept was totally unheard of. Book Value has been the norm and it suited institutions better. I remember the time when I used to wait outside the offices of GM/ED of Banks / Financial Institutions (FI) who literally rationed loans. We never had extra assets to mortgage as properties worth several times the value of loans have already been locked down by earlier loans and this wait was necessary to get an NOC to create a second charge for a new loan. Still the securities to total debt ratio managed a cool 4 to 1.

Cut to the early `00, the situation reversed. Liberalization meant multiple streams of credit available to Banks/FIs and FII, PE and Hedge Funds entry meant surfeit of money supply that had difficulty in finding room to get parked. Corporates reveled in this new order of things and leveraged themselves to the teeth. They had a problem of finding destinations to invest in. The recklessness fueled by sudden excesses meant bad judgment and funds literally got sucked into projects that turned out to be literal blackholes, from which nothing would come out.

And now we hear this. I am not surprised. Are you? I think history will repeat and it’s time we prepare ourselves to cool our heels at the reception lobby of Banks/FIs waiting to be called in by the GM/ED…or who knows, it could even be outside a Manager’s office at a Bank Branch…!

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