Page 237 - ES 2020-21_Volume-1-2 [28-01-21]

220 Economic Survey 2020-21 Volume 1

Figure 18: Misappropriation of Firm’s Resources – Evidence from
Related Party Transactions to Key Personnel

Source: MCA (for restructured loans) and CMIE Prowess for the composition of boards
Pre: Average percentage change of two years after and before for firms restructured during 2002-2006
Post: Average percentage change two years after and before for firms restructured during 2009-2015
Deterioration in performance of borrowers benefiting from forbearance

7.26 As a consequence of the weakened governance, the impacted firms’ performance
deteriorated. Figure 19 reports industry-adjusted changes in key firm fundamental ratios two
years before and after restructuring, both for the pre and post-forbearance regimes. There
was a significant increase in leverage (15.7%), measured as the ratio of debt to equity,
accompanied by a 27.2% decline in the interest coverage for firms restructured during the
forbearance regime. As noted before, interest coverage measures the ability of a firm to cover
debt servicing costs from current profits. Interestingly, firms restructured before forbearance
reported a 3.4% decrease in leverage, and a significant 49.6% increase in interest cover after
their loan was restructured. There also seems to be a detrimental impact on firms’ liquidity,
as evidenced by a 30% decrease in their quick ratio compared to a marginal 4% decrease in
the pre-period. Finally, the firms’ profitability, measured as profits as a proportion of firms’
3
assets, suffered a sharp decline of over 138% in the forbearance era. In other words, firms
benefitting from restructuring during the forbearance regime, on average, turned loss-making,
whereas profitability improved by around 15% for restructured firms in the pre-forbearance

3 For a firm, quick ratio is defined as the ratio of its current assets to its current liabilities