Companies must not rely too much on debt: Chakrabarty--Business Line 16.11.2013
KOLKATA, NOV. 15:
Amid criticism over repo rate hikes impacting growth and project financing, RBI Deputy Governor K.C. Chakrabarty on Friday said there was need to change the over-dependence on debt by companies.
There was also a need to look at other available alternatives, especially equity, which has thinned in the recent past. The need was for equity-based growth and not debt-led ones, he said.
“No project can work with bank finance only. What is the equity that has been raised (recently)? We do not see any new issue,” he said during an interactive session organised here by the MCC Chamber of Commerce and Industry.
According to Chakrabarty, over-dependence on debt would lead to high cost of borrowings. Projects with high debt component are “not viable”. “Equity market is almost dead...last four to five years new projects have gone for 100 per cent debt-led finance,” he said.
Interest forms a mere 6-8 per cent of the total cost for companies. The need is to contain the remaining 92 per cent of the cost by identifying slippages and through better utilisation of resources, he said.
The RBI hiked repo rates by a total 50 basis points at its policy review in September and October. The repo rate now stands at 7.75 per cent. India’s inflation based on the Wholesale Price Index (WPI) rose to an eight-month high of 7 per cent in October and Consumer Price Index at 10.09 per cent.
CONTAINING INFLATION
Meanwhile, Chakrabarty maintained that containing inflation remains the prime concern for the RBI and it is unfair to blame the central bank for low growth, as sustainable economic expansion is possible only when inflation moderates.
“If inflation goes up, interest rates will move up. Growth is sacrificed because of high inflation and not because of high interest rates,” he said, adding that the Indian economy has the potential to grow 9-10 per cent per annum if banks and industry function to their best.
Citing the need for producing more goods and services in order to reduce supply side pressures; Chakrabarty said: “High inflation is always inimical to growth and if we don’t control inflation we can never get growth.”
Further, he saw plenty of growth opportunities post-elections.
Chakrabarty, however, did not comment on the likelihood of further rate hikes and said the RBI’s job was not to “predict”.
‘Interest rate is a blunt tool to tackle inflation’
MUMBAI, NOV. 15:
Interest rate is only a blunt tool to tackle inflation and must be used occasionally, though carefully, RBI Governor Raghuram Rajan said “That is the only tool we have — and across the world central bankers recognise it… so they are careful about using it. But it has to be occasionally used,” Rajan said answering a question on why interest rate was being used to address inflation.
CPI inflation, measured by the movement in the retail prices of food items, soared to a seven-month high of 10.09 per cent in October. The wholesale price-based inflation too, shot up to an 8-month high of 7 per cent in the same month.
BALANCING ACT
According to Rajan, “One way to curtail inflation is to increase supply. The other way is to slow down demand. Typically, you have to follow a balancing act. We want to ensure that inflation doesn’t get out of control, but we also recognise that we are a weak economy and that a weak economy itself helps somewhat in inflation. In other words, demand is also weak.”.
“I think we need to bring down inflation and that is very much a focus for the RBI.” He said the economy is “in a period where we are struggling to pick up, though we have to wait and see the positive news coming in from good monsoons and the clearance of stalled projects’’.
Rajan said restructuring is a legitimate tool rather than evergreening to deal with asset quality concerns.
“Restructuring is a legitimate attempt to deal with changes that have happened, evergreening is trying to ignore the problem and taper over (for later) …and create large problems for future. Clearly, an important distinction we need to draw,” he said, taking questions from the audience.
Evergreening is a process where the principal amount of a loan is not required to be paid off within a specified period of time. Such a loan is usually in the form of a short-term line of credit that is routinely renewed, leaving the principal outstanding for the long term.
According to Rajan evergreening is “when you are trying to hide the problem and restructuring is when you are trying to deal with a problem, where the original zone doesn’t quite correspond with the altered circumstances.”
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