Debt is dynamite, RBI chief Rajan warns business

Warning corporate entities against the ill-effects of over-borrowing, Reserve Bank of India governor Raghuram Rajan on Thursday said debt is like "dynamite" which can be harmful with its "explosive" nature.

Rajan also said that RBI is maintaining a database which is shared among banks to avoid over-borrowing by large corporate houses.

"Debt is very much like dynamite. It is an instrument which is very useful in the right places and explosive in others," Rajan said at the Presidency University in Kolkata.

The central bank chief also called for moderation in use of debt as "there is always a temptation to over-use it".

He also made it clear that despite the difficulties associated with debt, "burying it is not an option".

"Moderation is required and some debt is good but not too much. Avoid over-borrowing to avoid problems," Rajan said.

He said RBI has a database of large borrowers whose status of borrowings is shared among banks.

Acknowledging that Indian banks have the right kind of leveraging, he added that "those who said the banks have no capital requirements are not sensible".

Citing the example of the Indian economy, he said the foreign share in government debt is 3-3.2 per cent, which is "very reasonable".

"It is easy to fall to the temptation of easy money from outside and then, get into problems later. There is a need for the golden mean," he stressed.

Talking about the need for debt in society, Rajan said it's also responsible for creating "an antipathy" among entities.

Rajan termed cutting interest rates to rock-bottom levels as "not a good idea".

"Better is to have growth in real activity rather than a financial market boom due to distortion in prices," the governor said.

Hailing the proposed goods and services tax (GST) as "a good move", he added, "It will remove barriers among states and make a common market. It will bring more people under the tax net."