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Leverage levels a major concern, says RBI

The Reserve Bank of India is concerned with the rising levels of debt in the domestic corporate sector with the central bank seeking a faster mechanism for commercial banks to clean up bad loans.

business Updated: Sep 23, 2015 22:54 IST
HT Correspondent
Reserve Bank of India
Reserve Bank of India(PTI File Photo)

The Reserve Bank of India is concerned with the rising levels of debt in the domestic corporate sector with the central bank seeking a faster mechanism for commercial banks to clean up bad loans.

“Leverage levels (of companies) in banks have risen substantially. This is a trend that is being seen globally,” RBI deputy governor SS Mundra said at a Confederation of Indian Industry meet for the companies’ CFOs on Wednesday. “Our simple message is if there is a problem, to recognise it and address it quickly. Don’t pretend and extend.”

Mundra raised an issue that has been a growing concern, as some companies have been finding it difficult to meet loan payment schedules, while some completely failing in commitments due to bankruptcy issues.

Weak and faulty demand projections in the past have led to many companies borrowing far beyond their capacities. The economic slowdown since 2009 has also led many companies to shut down, creating a problem for banks that had to write off many loans and suffer losses.

“An IMF report of April 2015 states that about 37% of corporate debt in India is a risk. Reports across the world show that Indian companies are most vulnerable in stress scenarios. This is an issue of maximum concern for a CFO and you have to walk the tight rope between many opposites both in your company and the market,” said Mundra.

Auto components maker Amtek Auto recently defaulted in bond payments worth Rs 800 crore to its lenders, highlighting the problem.

On growth in start-ups, he said: “In start-ups, the question is not just of liquidity, but also immense pressure to scale up rapidly without necessary compliance, support and ecosystem. There is need to exercise caution there.”