Companies will find it difficult to service debt, BoB report

The corporate sector’s debt servicing facility is likely to come under pressure once again due to the spillover effect of tightening global financial conditions and inflationary consequences, Bank of Baroda said in a report. Companies will find it difficult to service their debt as the RBI has already front-loaded 140 basis points (bps) in policy rate, which will lead to a further increase in interest rates on corporate loans.

“Going forward, in the current rising rate cycle where RBI has already front-loaded 140bps hike in policy rate, interest payment is going to increase. Thus, interest coverage ratio in FY23 is likely to deteriorate,” the lender said.

Companies in the infrastructure sector such as capital goods, iron and steel, construction and automobile had shown an improvement in FY22. Aviation, hospitality and consumer durables sectors were under pressure as companies took a bigger hit on earnings during the pandemic.

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Bank of Baroda examined the financial performance of 3,180 companies based on the data for the financial year 2021-22 and reviewed the trend in interest coverage ratio, which reflects the comfort level of companies in debt servicing. According to FY22 data, some sectors had shown an improvement in their ability to make loan payments.

The debt servicing ability of the corporate sector is seen to be improving, although the increase is tilted in favour of large enterprises, with the MSME sector remaining under pressure as the interest coverage ratio has sustained below 1 since FY18 onwards.

State Bank of India (SBI) has posted higher slippages and NPAs in the SME segment in Q1FY23, which came from its restructured book, Dinesh Khara, chairman said in a post-earnings meeting.

The banking sector credit outstanding to industry increased by 9.5% in June, with loans to micro and small industries growing by 29% year on year (YoY) while that to medium industries by 47.6% YoY. Overall, non-food credit grew by 13.7% in June 2022 as compared with 4.9% a year ago. Bank lending to the corporate sector is on the rise due to rising bond yields and lower issuance of commercial papers (CPs) by the corporate.

Despite a moderation in operating margin of the companies in FY22, interest coverage of companies improved, clearly reinforcing the view that the RBI’s accommodative policy supported this trend, the Bank of Baroda report said. The ratio also showed consistent improvement over the 5-year scenario, except in FY20.