Drawing an analogy between high leverage-low equity and skating on thin ice, Mundra says companies with high leverage levels ran the risk of “tripping and injuring” themselves
Mumbai : The Reserve Bank of India Deputy governor SS Mundra 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. 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 USD30 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.
Mundra added that another issue which bothered him was the multiple layer structure of companies. “…you have a holding company sitting somewhere in the cloud and there are several step-down subsidiaries. If you are leveraging at the first level of equity with debt, and at every subsequent level, the debt is assuming the colour of equity and getting multiplied geometrically, and after three or four steps, there is a trickle down impact… It becomes like homeopathic medicine, where you say only ‘bhavna’ has remained and the substance has gone,” he 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.
