Interest coverage ratio in FY23 is likely to deteriorate Bank of Baroda study

MUMBAI, August 10 (IANS) – Corporate interest payments will increase going forward as interest rates are expected to rise in a tightening cycle in which the Reserve Bank of India (RBI) has proposed a rate hike of 140 basis points.

Interest payments will also increase due to global financial conditions and inflationary pressures.

Previously, the rate-cutting regime helped companies improve their ability to repay debt. The interest coverage ratio has thus increased in fiscal year 22.

However, the increase tends to benefit large companies, with the MSME sector still under pressure. Small industries remain vulnerable in terms of interest coverage ratios.

In both FY21 and FY22, losses resulted in a negative ratio. Similar trends can be observed even among microenterprises. This is despite the government’s and RBI’s actions to improve the creditworthiness of the MSME sector, including the ECLGS scheme.

“It is clear that the ratio of small and micro enterprises remained below 1 in fiscal 2018. So these sectors had worsened debt service capacity even before Covid,” the study said.

From an industry perspective, aviation, durable goods and hospitality remain significant risks of a post-Covid slowdown. However, only a few infrastructure sectors such as capital goods, iron and steel and construction have better interest coverage ratios.

Interest coverage increased in FY21 due to lower repo and WALR rates, and a similar trend continued in FY22.

In recent finances, despite the decline in operating margins (operating profit/net sales), corporate interest coverage has increased, significantly reinforcing the view that the RBI’s policy adjustment supports this trend.

The company’s operating profit has grown at a compound annual growth rate of 8.4%, while interest rates have increased by 4.8% over the past five years. The five-year average corporate interest coverage is 4.8.

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