Corporate leverage

A steep rate cut by RBI because of excess liquidity would perhaps have given a breather to these debt-laden companies


Photo: Aniruddha Chowdhury/Mint
Photo: Aniruddha Chowdhury/Mint

Expectations of a steep cut in interest rates were dented last week after the Reserve Bank of India decided to suck out excess liquidity through the cash reserve ratio. Corporate entities struggling with high debt were among the most disappointed borrowers. A steep cut in lending rates because of excess liquidity would perhaps have given a breather to these debt-laden companies.

A new report by India Ratings and Research shows that even in a high-growth scenario, 111 among the top 500 borrowers in the corporate sector are unlikely to generate return on capital employed that will be higher than the weighted average cost of capital.

A Mint analysis published earlier this month showed that Indian companies are selling assets at the fastest pace since liberalization to reduce debt. A possible near-term hit to economic activity and growth because of the demonetization of high-value bank notes will only complicate matters for highly leveraged companies.

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