Reserve Bank deputy governor SS Mundra today expressed concerns over high corporate sector leverage and said the leverage level should be like normal blood pressure, which is neither too high nor too low.
“A major concern today in the global arena is the leverage of corporates, which has enhanced substantially in the last few years,” Mundra said in a speech at a CII event here today.
He said if a company operates with less equity, it is like skating on thin ice where one runs the risk of tripping and injuring himself.
“The leverage level should be like blood pressure in the body. It should neither be too high or too low. Both are injurious to health,” Mundra said.
It could be noted that the Financial Stability Report released by the RBI in June this year had also issued a red flag against rising corporate leverage.
Private corporates are responsible for most of the forex debt of the country which stood at close to USD 476 billion.
They had raised more than USD 30 billion in overseas bond sales alone last year as the domestic interest rates remained very high.
Many others converted their high-priced rupee loans into forex loans to save on interest cost, which is a cool 5-6 per cent.
As per RBI data, the country’s external debt as of March 2015 stood at USD 475.8 billion recording an increase of USD 29.5 billion or 6.6 per cent over its level in March 2014.
And most of this is external commercial borrowings by companies and non-resident deposits.
In GDP terms, the external debt to GDP ratio stood at 23.8 per cent as of March 2015, recording a marginal increase over its level of 23.6 per cent in March 2014.
Across borrower categories, the outstanding debt of both government and non-government sectors rose and their shares in total external debt stood at 18.9 per cent and 81.1 per cent, respectively, as of March 2015, the RBI said.
“Besides its adverse impact on banks’ balance sheets, high leverage of corporates may hinder the transmission of monetary policy impulses as corporates may not be in a position to benefit from falling interest rates due to high levels of debt,” the report said.
Liquidity
“Liquidity conditions in the economy remained tight during mid part of the quarter and eased towards the quarter end. The cash position of the government during the first quarter of FY16 was comfortable and remained in surplus mode during the quarter,” the statement added.
Concerns over asset quality
Mundra also raised concerns over the asset quality of the banking system. “A simple message is that if there is a problem, it is important to recognise it and address it quickly rather than, what we have always been telling, don’t pretend and extend,” Mundra said.
If NPA problems are not resolved at the correct time then it could enlarge going ahead.
The deputy governor said the RBI on one hand has taken away the forbearance but on the other hand asked banks to form the joint lender forum (JLF) or the 5/25 scheme or the strategic debt restructuring in the cases which are genuine.
Talking about the unhedged exposure of corporates, Mundra said the levels are not very high and still manageable.
”...still they continue to remain (manageable). There are unhedged exposures in the system. I do not see any significant rise in the level that it used to be,” Mundra said.