Despite a 60 basis point ( 0.60 percent) rise in policy rates between September 2022 and September 23, corporate debt servicing as measured by interest coverage ratio improved from 4.49 in September’22 to 5.64 in September 23 implying higher lending rates have not hit debt servicing capacity of Indian firms.
Interest coverage ratio or ICR is a measure of debt servicing capacity of a firm. The improvement ICR goes to show that the fear that higher repo rate leading to higher lending rates would pressurise companies has been put aside, a report by Bank of Baroda said.
“ Interest cover ratio of the companies has shown a marked improvement, led by both lower growth in interest costs as well as higher growth in profits” said Aditi Gupta, economist at Bank of Baroda in a report. ” This bodes well from the perspective of debt service capability of these companies”.
Though the Reserve Bank of India has not changed its benchmark policy rates since February 2023, banks have been raising lending rates on new loans. Weighted average lending rates on new loans increased to 9.38% in September 2023 from 8.59% in Sep’22. Overall growth in bank credit for this quarter was 17.6% , marginally lower than 18.9% last year. “ Even so, the ICR has shown an improvement as the higher interest costs have been offset by a sharp uptick in profits” Gupta said.
Interestingly the 10 largest indebted sectors such as power, crude oil, infrastructure, realty, automobiles, chemicals, logistics and textiles, besides the telecom and iron and steel have witnessed improvement in their ICR.
“ Quite clearly the ICR will be dependent mainly on performance of companies in terms of growth in profits” the report said. “ Based on trends witnessed in the first two quarters it does seem like that growth in profits will be maintained in the following two quarters too given that the WPI inflation numbers which reflect to a large extent the growth in input costs has been under control at low if not negative levels. If this feature continues it will also have a soothing effect on the quality of assets, according to the report.
