Some of the corporates have raised unsustainable amount of debt from various sources, including banks and overseas financial institutions, without showing any regard to domestic and global demand situation, RBI Deputy Governor S S Mundra said today.
The obvious fallout of this indiscriminate borrowing is a severe deterioration in their ability to service debt, besides casting an adverse impact on banks’ balance sheets, he said, adding the banking system would be held partially responsible for this situation.
RBI Governor Raghuram Rajan had also expressed similar views recently when he said rich businesses owing large sums to banks should behave and not flaunt “massive birthday bashes” while still in serious debt.
“Corporate sector leverage has currently become an issue of a great concern for the economy in general and banking system in particular. In the lead up to the crisis and even beyond, some of the Indian corporate houses raised unsustainable amounts of debt from various sources, including bank finance and oversees borrowings.
“As we notice now, several indiscriminate corporate houses continued market borrowing with a view to increase their market share and to expand capacity without any regard to domestic and global demand situation,” Mundra said here.
Some of them may fall in the category of “ponzy borrowers”, he said, speaking at Banking Research Conference- 2016 organised by ICFAI Foundation for Higher Education.
“An indirect outcome of higher corporate leverage is also likely in terms of poor transmission of monetary policy impulses as corporates may not be in a position to benefit from falling interest rates due to already high levels of debt,” the Deputy Governor said.
In India, about a third of corporate debt is owned by companies with a debt-equity ratio of more than 3, he said.
According to him, a number of companies had borrowed heavily to set up infrastructure projects that have got stalled and subsequently faced cost overruns due to factors such as delays in receiving various clearances, cancellation of coal or gas linkages, protests from environmentalists.
He said thorough research has to be done into 3-4 of these stalled projects and the outcome can be case studies for reference not only at management institutes but also by all stakeholders, including Government entities and regulators.
Banks need to improve their productivity, efficiency, make a quantitative assessment of revenue streams and put in place a robust transfer-pricing mechanism for efficient capital allocation, Mundra said.
“At the same time, the banks need to venture into hitherto untapped segments to identify profitable business opportunities. One key segment that banks are increasingly looking at is the customers at the bottom of the pyramid. Financial inclusion, as you all know, is the new buzzword.
“While everyone agrees that the segment has immense potential, it is certainly not a low hanging fruit. If the banks wish to profit from financial inclusion on a sustained basis, they would need to innovate and leverage technology,” Mundra said.
He said there are a few “bread and butter” areas, which according to him, have remained under-researched. They include credit to agriculture, Micro, Small and Medium Enterprises (MSMEs) and private sector leverage.
Talking on the collection of date for research, he said “very often, even within RBI, we have to grapple with inconsistent, incoherent and incomplete data sets which severely undermine policy formulation. There are also problems around data design and data architecture like varied definitions, different reporting dates, etc.”
As per the recent RBI Internal Working Group, set up to revisit existing priority sector lending guidelines, the commercial banks have failed to achieve the targeted level (of 18 per cent) credit to agriculture sector in all but three years between 2001 and 2014.
Hence, the sector witnesses two contrasting trends – unmet credit needs of the farmers on one hand and shortfall in lending targets of the banks on the other – despite agriculture being designated as one of the priority sectors for lending, the RBI Deputy Governor said.
On MSME sector, he said there are an estimated 49 million MSMEs in the country, providing employment to 111 million people – next only to the agricultural sector.
They account for 45 per cent of the manufacturing output and contribute close to 40 per cent of all exports from India.
“Despite a large contribution of the MSME sector to the GDP, the sector often complains about lack of financing from institutional sources. As on March 2015, only 8.4 per cent of the gross non-food credit from scheduled commercial banks (SCBs) was lent to MSMEs against 11.0 per cent in March 2010. This is despite increased distress in banks’ books in their lending to large corporates over the same period.”
In order to improve liquidity for MSMEs, an electronic Trade Receivables Discounting System (TReDS) is being set up by RBI to enable a speedy realisation of receivables, he said.