In the last about six months we are hearing news about large, established, well-rated Indian companies defaulting on their debt i.e. loan obligations. Default not only in interest payments but possibility of defaults in returning the principal as well.
Please be very cautious if you have money places in company fixed deposits and with private loan borrowers. Debt funds are also getting affected but the impact will be much softer.
Further, defaults are not just restricted to financial commitments but likely to spread across other big commitments also e.g. real estate, infrastructure etc in times to come.
All of this is a little hard to believe because this is happening in a situation where everything looks good and positive. It is a bit disturbing.
It’s hard to pinpoint anything specific which is the cause of all this, but in my view it’s rationalisation of excesses. In simpler words there is far too much supply v/s the demand of consumers. In even simpler words for any company to make a profit, a consumer like you or me have to buy their products and services. But there is a limit to how much we can buy right? And because they think that we are going to buy endlessly they keep producing more, taking more risk and taking more loans. Also, other reasons being under pressure to make profits, unnecessary greed to higher profits and similar.
And we all know what happens when you take loans beyond your capacity to repay. Something like that is happening in some pockets and not everywhere. News flow and what’s app sensationalize things. The saving grace for India is that Indians don’t like being defaulters and don’t like bankruptcy. I think this culture is still largely intact.
Yes, all this, it’s a concern but no need to panic so long as we’re holding a diversified portfolio and that we are.