Bank of Baroda: Interest Coverage Ratio in FY23 Likely to Deteriorate: Bank of Baroda Study

Corporate interest payments will increase going forward as interest rates are expected to rise in the rate hike cycle where the Reserve Bank of India (RBI) has already anticipated a 140 basis point hike in the key rate .

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

Previously, the decline in the interest rate regime helped to improve companies’ debt servicing capacity. As a result, the interest coverage ratio improved in FY22.

But the improvement is skewed in favor of larger companies, with the MSME sector still under pressure. Small industries remained vulnerable in terms of interest coverage ratio.

In both years FY21 and FY22, the loss gave a negative ratio. Even for micro-enterprises, a similar trend is observed. This is despite the steps taken by the government and the RBI to improve the credit health of the MSME sector, which includes the ECLGS scheme.

“Clearly, for small and micro enterprises, the ratio has remained below 1 since FY2018. Thus, before Covid as well, these sectors had deteriorating debt servicing capacity,” the study says. .

From an industry perspective, aviation, consumer durables and hospitality still face considerable risk, a post-Covid induced downturn. However, few sub-sectors such as capital goods, iron and steel, construction have better interest coverage rate.

The interest coverage ratio improved in FY21 due to lower repo rate and WALR, and a similar trend continued in FY22.

Over the past year, despite a moderation in operating margin (operating income/revenue), coverage of corporate interests has improved, clearly reinforcing the view that RBI’s accommodative policy has supported this trend.

Corporate operating profit grew at a compound annual growth rate of 8.4%, while interest grew 4.8% over the past five years.

The five-year average for corporate interest coverage was 4.8.

Sallie R. Loera