Mundra frowns at rising corporate leverages

Reserve Bank deputy governor SS Mundra on Wednesday 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 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. 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.