With reference to Anup Roy's report, '"Indian firms de-leveraging fast, says SBI" (May 10), the assertion coming from the research wing of India's largest bank should be happy news for researchers and academia, except when we consider the following facts.
The aggregate decline in debt levels (Rs 6,862 crore) in 2015-16 is nominal, considering the total indebtedness of companies during that financial year. Indian companies raised a record Rs 4.6 lakh crore in 2015-16 through private placement of corporate bonds to meet their business needs - surge of 13 per cent over that of the previous fiscal. The total indebtedness of companies in 2015-16 would be high also when their indebtedness to the Indian banking system is considered. The total debt accounted for seven to nine times their equity levels.
A debt equity ratio of 9:1 is considered high by any standards. Corporate India is addicted to debt. Even the Financial Stability Report released by the Reserve Bank of India (RBI) recently, stated, While leverage has increased, the ability to repay debt and debt servicing ability of corporates has declined."
Although several financial parameters are available to assess the financial health of companies, experts tend to use only those parameters that support their viewpoint. The dispute is not regarding the use of such parameters to prove a point, but about how realistic an expert is in his/her assessment.
K V Rao, Bengaluru
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The aggregate decline in debt levels (Rs 6,862 crore) in 2015-16 is nominal, considering the total indebtedness of companies during that financial year. Indian companies raised a record Rs 4.6 lakh crore in 2015-16 through private placement of corporate bonds to meet their business needs - surge of 13 per cent over that of the previous fiscal. The total indebtedness of companies in 2015-16 would be high also when their indebtedness to the Indian banking system is considered. The total debt accounted for seven to nine times their equity levels.
A debt equity ratio of 9:1 is considered high by any standards. Corporate India is addicted to debt. Even the Financial Stability Report released by the Reserve Bank of India (RBI) recently, stated, While leverage has increased, the ability to repay debt and debt servicing ability of corporates has declined."
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The RBI referred to the interest cover and debt servicing ratios to prove its point. The State Bank of India report cited by this newspaper relegated the importance of these ratios.
Although several financial parameters are available to assess the financial health of companies, experts tend to use only those parameters that support their viewpoint. The dispute is not regarding the use of such parameters to prove a point, but about how realistic an expert is in his/her assessment.
K V Rao, Bengaluru
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number