The last couple of months have seen renewed optimism in the corporate sector, the result of a turnaround in sales and profits seen in the March quarter results. But in a speech a few days ago, Reserve Bank of India (RBI) governor Raghuram Rajan warned, “Rather than an across-the-board shrinkage of public sector lending, there seems to be a shrinkage in certain areas of high credit exposure, specifically in loans to industry and to small enterprises."

An RBI study on the performance of the private corporate sector in the quarter seems, at first glance, to echo the optimism. It finds that aggregate sales grew by 2.3% after contraction for four successive quarters and that net profit grew by 16.4% in Q4 2015-16 against 15.9% in the previous quarter. But a closer look shows a rather different picture.

Chart 1, from the RBI study, shows the performance of non-government, non-finance companies, according to the size of sales. It shows that year-on-year growth in sales improved substantially in the March quarter for companies with annualised sales of ₹ 1,000 crore and above. Smaller companies have either seen slower growth in sales, or have seen their sales shrink a little less from a year ago.

The main beneficiaries of the growth in net profits too have been the very large firms. Also, while larger companies have seen an improvement in their ability to service their debts, as seen from the rising interest cover, the average firm with sales less than ₹ 100 crore annually is in a precarious financial position, unable to service its debts.

This state of affairs is far from being unusual—it’s well-known that large firms weather storms better than smaller ones and they also often squeeze payments to their smaller suppliers.

Given this state of affairs, it’s no wonder that in the industrial sector too, banks are lending to large firms rather than smaller ones. Chart 2 has the details, with data from the RBI. Note that, as on 27 May 2016, bank credit to large firms accounted for 82% of total bank credit to industry.

Has the situation improved recently? Not really. Chart 2 shows that bank credit between mid-March and end-May 2016 has shrunk across small, medium as well as large industry this year, compared to last year. True, credit growth is usually very sluggish at this time of the year, but the shrinkage this year is even more than last year. All eyes will now be on the June quarter results to see whether corporate recovery is becoming more broad-based.

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