Indian Companies Show Improved Debt Servicing Despite Higher Lending Rates

Key Takeaways:

• Despite a 60 basis point increase in policy rates and rising lending rates, Indian firms have shown an improvement in their debt-servicing capacity, as reflected by the interest coverage ratio (ICR).
• Factors contributing to this improvement include lower growth in interest costs and higher growth in profits.
• The 10 largest indebted sectors, including power, crude oil, infrastructure, realty, automobiles, chemicals, logistics, textiles, telecom, and iron and steel, have witnessed an improvement in their ICR.
• The outlook suggests that continued growth in profits will have a soothing effect on the quality of assets.

Analysis of Corporate Debt Servicing and Interest Coverage Ratio (ICR) Improvement

The provided information discusses the improvement in corporate debt servicing, as measured by the interest coverage ratio (ICR), despite a 60 basis point increase in policy rates between September 2022 and September 2023. The interest coverage ratio is a measure of a firm’s ability to service its debt. The key points from the provided information are as follows:

1. Improvement in ICR: The interest coverage ratio improved from 4.49 in September 2022 to 5.64 in September 2023, indicating an enhancement in the debt-servicing capacity of Indian firms.

2. Impact of Higher Lending Rates: Despite the rise in policy rates, the improvement in ICR suggests that higher lending rates have not negatively impacted the debt-servicing capacity of Indian firms.

3. Factors Contributing to ICR Improvement:

Lower growth in interest costs.

Higher growth in profits.

4. Bank Lending Rates: Although the Reserve Bank of India has not changed its benchmark policy rates since February 2023, banks have been raising lending rates on new loans. The weighted average lending rates on new loans increased to 9.38% in September 2023 from 8.59% in September 2022.

5. Sectoral Improvement: The 10 largest indebted sectors, including power, crude oil, infrastructure, realty, automobiles, chemicals, logistics, textiles, telecom, and iron and steel, have witnessed improvement in their ICR.

6. Outlook: The improvement in ICR is expected to be dependent mainly on the performance of companies in terms of growth in profits. The report suggests that if the current trends continue, it will have a soothing effect on the quality of assets.

Conclusion

The data indicates a positive trend in the debt-servicing capacity of Indian firms, as reflected by the improvement in the interest coverage ratio despite the increase in policy rates and lending rates. The factors contributing to this improvement, such as lower growth in interest costs and higher growth in profits, have played a significant role. Additionally, the sectoral improvement in ICR and the outlook for continued growth in profits suggest a favorable trajectory for the debt service capability of these companies.

FAQ

Q1: What is the interest coverage ratio (ICR)?

A1: The interest coverage ratio is a measure of a firm’s ability to service its debt. It is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expenses.

Q2: How has the debt-servicing capacity of Indian firms been impacted by rising lending rates?

A2: Despite the increase in policy rates and lending rates, Indian firms have shown an improvement in their debt-servicing capacity, as indicated by the interest coverage ratio.

Q3: Which sectors have witnessed an improvement in their interest coverage ratio?

A3: The 10 largest indebted sectors, including power, crude oil, infrastructure, realty, automobiles, chemicals, logistics, textiles, telecom, and iron and steel, have witnessed an improvement in their interest coverage ratio.