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While corporates keep up a constant din, seeking a cut in the policy rate by the Reserve Bank of India, here is an observation by the latter they may do well not to ignore.
The Financial Stability Report has pointed out that high leverage by corporates may hinder the transmission of monetary policy impulses, as they may not be in a position to benefit from falling interest rates due to high debt levels.
“Concerns remain around the corporate sector leverage, especially in the context of its ability to service debt. While leverage has increased, the ability to repay debt and debt servicing ability of the corporates has declined,” the report said. This could lead to adverse impact on banks’ balance sheets. An IMF working paper has pointed out that financial performance of India’s corporate sector has been under pressure since the Global Financial Crisis. Balance sheet data of a large cross-section of Indian non-financial corporates show that growth in their leverage over the last 15 years has been associated with a notable increase in vulnerabilities of firms carrying high interest payment burdens, the paper said.
Gauged by the debt carried by the most vulnerable component of firms, the Indian corporate sector’s vulnerability to severe systemic shocks has increased to levels not seen since 2001.
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