Higher Interest Costs, Yet Corporate Debt Servicing Improves

Despite a rise of 60 basis points (0.60 per cent) in repo rates between September 2022 and September 2023, the interest coverage ratio in corporate debt servicing has improved from 4.49 to 5.64, during the same period implying that the higher lending rates have not hit debt servicing capacity of Indian firms.

Interest coverage ratio (ICR) is a measure of the debt servicing capacity of a firm. The improvement in ICR highlights that the fear that higher repo rates leading to higher lending rates on credit would pressurise companies has been put aside, a report by Bank of Baroda said.

Aditi Gupta, economist at Bank of Baroda in a report that the ICR of the companies has shown a marked improvement, led by both lower growth in interest costs as well as higher growth in profits. This bodes well from the perspective of the debt service capability of these companies.

The Reserve Bank of India(RBI) has not changed its benchmark policy rates since February 2023 but banks have been raising lending rates on new loans.

Weighted average lending rates on new loans increased to 9.38 per cent in September 2023 from 8.59 per cent in September 2022. Overall, the growth in bank credit for this quarter was 17.6 per cent, marginally lower than 18.9 per cent last year. The ICR has shown an improvement as the higher interest costs have been offset by a sharp uptick in profits, Gupta said. 

Interestingly the ten largest indebted sectors such as crude oil, power, realty, infrastructure,  automobiles, logistics, chemicals and textiles, besides iron and steel and telecom have witnessed improvement in their ICR.

The ICR will be a dependent function mainly on the performance of companies in terms of growth in profits, the report added.