Raghuram Rajan warns of market meddling

As markets continue to plunge in China, Indian central bank governor Raghuram Rajan warned his own country needed to avoid meddling of its own stock market, as it looked to continue digging out its own heavily indebted corporate sector.

Speaking at a major annual banking conference in Mumbai, Mr Rajan said little on the turmoil engulfing Asian markets, which sent India’s benchmark Sensex down around 4 per cent this morning and pushed the rupee below Rs66 to the US dollar

But he gave a thinly-disguised warning to New Delhi to avoid propping up companies whose bullish borrowing habits now leave little chance getting back on their feet.

“The history of every situation of stress is that you have to be able to tell the viable companies apart from the unviable companies,” Mr Rajan said. “Too much indiscriminate help to the unviable companies can render the whole industry itself unviable, and that is something that we need to be able to tell apart in India.”

Analysts have long been anxious about India’s corporate debt levels, and the knock-on effect for non-performing assets in the banking sector.

Over recent months, however, hopes of a rapid improvement in problem loans have receded, following a series of lacklustre results for industrial businesses and state-backed lenders.

Last week, Credit Suisse research pointed to a further deterioration in the first quarter of this financial year, noting that the share of total debts held by companies with an interest cover ratio of less than 1 — meaning those not generating enough revenue to meet interest costs — had edged up to 42 per cent, compared to 35 per cent two quarters back. This suggests the position of already severely stressed companies is worsening.

Mr Rajan said the Reserve Bank of India would continue to work with New Delhi to put delayed or otherwise troubled industrial projects back on track, which he said provided the only long-term solution to India’s debt woes.

However he reiterated previous warnings that India’s ongoing efforts to strengthen its rules on corporate debt, including a forthcoming new bankruptcy code, should also tackle the problem of prominent industrial tycoons appearing to be able to avoid the consequences of their bad borrowing decisions.

“We also must restore a balance that has somehow gone the wrong direction in India,” he said. “The risk taker should bear the cost of the risk, and should not push the risk somewhere else when bad times come, but take the benefit of the risk that is the upside in good times.”