Excessive leverage poses balance sheet risk. It also makes interest servicing a difficult task. If one were to go by the IMF's latest financial stability report, leverage ratios in India's corporate sector appear to be a potent source of risk. As can be seen in today's chart, the debt to equity ratio of India's corporate sector stands at 83%. This is highest amongst emerging market peers. When compared to advanced economies, only Greece and Italy have higher debt to equity ratio than that of India.
Higher leverage signifies that India's corporate sector is quite sensitive to interest rate changes. If interest rates increase, the borrowing cost of corporates will rise further. With debt already being at un-proportionate levels servicing the same could be a challenge. This may result in defaults. Higher debt also reflects the inherent non-performing asset (NPA) risk prevailing in the banking system. If corporates fail to repay their loans and default Indian banks may turn vulnerable. This can have serious repercussions on the economy.
Higher leverage signifies that India's corporate sector is quite sensitive to interest rate changes. If interest rates increase, the borrowing cost of corporates will rise further. With debt already being at un-proportionate levels servicing the same could be a challenge. This may result in defaults. Higher debt also reflects the inherent non-performing asset (NPA) risk prevailing in the banking system. If corporates fail to repay their loans and default Indian banks may turn vulnerable. This can have serious repercussions on the economy.
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