A country’s economy has a direct correlation with the performance of companies and accessibility to funds. Accordingly, poor performance by companies leads to difficulties in servicing debt and/or accessing additional debt (thereby overleveraging) and then in turn stressed assets. Stressed assets lead to issues for the lending institutions, including increased provisioning requirements and lack of liquidity. Reduction in the capacity of the banking system to provide funding further adversely affects companies and thereby the economy.
Organizations such as the International Monetary Fund and the Asian Development Bank have trimmed their growth forecasts for India and now expect growth of 7.4% to 7.5%. Among the reasons for such revisions in projections are the slowdown in public investment, stressed corporate balance sheets and declining exports.
The Financial Stability Report issued by the Reserve Bank of India (RBI) in December 2015 lists the infrastructure sector as one of the five sectors that contribute to around 53% of the stressed assets in India today. There is no doubt that infrastructure is also the sector in need of maximum funding in India.
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Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Sharmila Ratnam is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.
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