‘Cost of capital in India high but easing up’

Deputy governor of Reserve Bank of India, Urjit Patel said a prime reason for the relatively high cost of capital in India was the cost of restructuring bad loans.

By: Express News Service | Updated: September 17, 2015 6:38 pm
capital cost, capital cost in india, cost of capital in India, indian economy, economic growth, US Fed, US federal reserve bank, business news, economy news Minister of state for finance Jayant Sinha said money was costliest for those who were the smallest like the micro enterprises.

On a Thursday morning at an intense debate, a group of CEOs, a minister and a central banker agreed that the cost of capital in India was high but was easing up. The debate was timely coming just hours before the US Fed makes out a case for changing interest rates in the US economy, directly and for the rest of the world indirectly.

Michel Lies, group chief exective, Swiss Re, the second largest re-insurance company in the world said capital was costly in India primarily because of the twin deficits–fiscal and current account or the internal and external ones. To the extent these deficits were easing up the cost of capital in India was climbing down. He was speaking to an audience at the event jointly organised by Ficci, its affiliate ICC and Delhi based think tank India Foundation.

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Agreeing with him Kimball Chen, chairman and CEO, Energy Transportation Group of USA that provides energy solutions across the world added another line of concerns. Chen said cost of capital would remain high in India if policies fluctuate. “Investment moves well when the direction of change in government policy is steady”, he said. His prescription for India was to stick to standards including sticking to schedules for global tenders and cut back on an emphasis on giving preference to domestic companies. All of these raise the cost of capital, he argued.

At this point, deputy governor of Reserve Bank of India, Urjit Patel said a prime reason for the relatively high cost of capital in India was the cost of restructuring bad loans. This squeezed the ability of banks to provide more capital for fresh ventures. Using statistics, Patel showed that of each rupee of incremental capital only 40 per cent came from banks with a similar amount coming from non-banking companies. The remainder 20 per cent was raised from foreign markets, he said.

Minister of state for finance Jayant Sinha agreed with them that capital was relatively costly in the Indian markets “not all of which was due to RBI”. He said the large industries were able to raise money at the same rates as abroad after accounting for currency differences.

Money, he said was costliest for those who were the smallest like the micro enterprises. This is where the current government initiatives made sense, he pointed out. Just as the Jan Dhan yojana had tapped Rs 22,000 crore of small savings from the poorest at low cost to offer them soft loans, the insurance cover for them would allow them to take up more risks besides opening up the market to the insurance companies.

Sinha said this was part of a set of measures to keep capital costs low.

One of those for the equity market was to give room for pension funds like the Employees Provident Fund Organisation to increase investment inequities from the current 5 per cent all the way upto 15. Long term papers cut volatility in markets and that reduces cost of capital.

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  1. Dr.T.V.Gopalakrishnan Krishnan
    Sep 17, 2015 at 8:15 pm
    Like the planning Commission replacement, the bureaucracy housed in South and North Block needs an immediate repalcement so that Mr Modi's dream of having ache din would be a reality. Judicial reforms and the systems and procedures in the w administration pursued in the country need very urgent attention to improve the ease of doing business in practice. In paper lots of improvements are attempted but not in practice thanks to conservative thinking.
    1. K
      kulaputra kulaputra
      Sep 18, 2015 at 6:48 am
      I have been running a small business for 15 years and I find the cost of capital unaffordable. Equity takes time and debt is unavailable except at exorbitant rates. Our USA based start-up finds it easier to get both equity and debt funding. What easing Mr Sinha is talking about is completely imaginary.
      1. Vish Ontoor
        Sep 23, 2015 at 12:59 am
        Your USA based startup would need to follow rules and regulations. If you break them, you will end up in jail for as long as 50 years. In India, you can afford to take multiple loans on the same property and not pay the bank even a single paise --- but this is when you know people. In Congress's time, people like Mallya even became Rajya Sabha members.
        1. Prasanakumar Tripathy
          Sep 17, 2015 at 7:14 pm
          Twin reforms needed. Judiciary, probable the worst in India. Bureaucracy, most corrupt in any leading economy. Unless there is improvement in these two sectors, the cost of capital will continue to be high.