The banking sector may start asking for greater equity from highly leveraged companies as the Reserve Bank of India (RBI) has identified a disturbing practice particularly among promoters of large infrastructure projects to camouflage debt as equity through a labyrinth of holding and subsidiary companies, thereby turning the projects risky.
"There should be more serious introspection as to to why distress happened to a large number of projects, particularly in infrastructure. One reason we see is that many of these projects have been brought up under thin equity. Operating a large project in thin equity is like staking on thin ice. There are always chances of toppling over, RBI deputy governor SS Mundra said.
"In these cases you don't even know the true nature of the equity. In a complex structure of multi-layers of holding companies operating in different jurisdictions there something which is taken as debt by the holding company sitting at the top is passed on to the subsidiaries as equity. So in the operating company you don't know whether the equity sitting at the books is actually equity or not," he said.
While the going is good, such a scenario doesn't normally create problems, but if there is slight break in the virtuous cycle of growth the stress will show, Mundra said addressing members at Confederation of Indian Industry.
"These are the patterns we have observed and we are sounding out the caution," Mundra said, but ruled out any fresh regulations on this.
Mundra said while it could be prudent to extend more loans to already leveraged companies if there is genuine economic activity, banks may ask for greater equity participation from the promoters.
"RBI doesn't micro-manage banks. Ultimately it is for the individual banks to decide what debt-equity ratio they would be comfortable with," Mundra told reporters.
The regulator is also not concerned with instance of a wilful defaulter like Vijay Mallya going to the court and getting a stay on the proceedings against him by the banking sector.
"There is a misconception that RBI is a super regulator. There are legislative and judicial systems. While we always flag these issues when we supervise these assets we can't issue a fiat that can overrule the judicial system," he said.
RBI would shortly come out with guidelines on refinance of existing projects as demanded by the industry, he said, adding that new projects would get the scope for refinance every five years till the economic life of the projects.
On policy stance, he said RBI may lower repo rate if factors leading to low inflation remain unchanged.
"We are at a point of time where the economic environment is quite encouraging. Of course, it has been supported by global factors – oil prices are at an all-time low, commodity prices are low, and food prices have been softening from the past levels... If all these things continue to remain as they are, there will be room for softening of the policy rate," Mundra said.
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