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

MUMBAI, Aug 10: The interest payments of the companies is going to increase going forward because interest rates are expected to go up in the rising rate cycle where the Reserve Bank of India (RBI) has already front loaded 140 basis points hike in policy rate.
Interest payments will also rise due to global financial conditions and inflationary pressure.
Earlier, the falling interest rate regime has helped in improving the debt servicing ability of companies. Thus interest coverage ratio has improved in FY22.
But improvement is skewed in favour of large enterprises, with the MSME sector still under pressure. Small industries continued to remain vulnerable in terms of interest coverage ratio.
In both the years FY21 and FY22, loss has yielded a negative ratio. Even for micro enterprises, a similar trend is observed. This is despite the measures taken by the government and RBI to improve credit health of the MSME sector which includes the ECLGS scheme.
“Evidently, for small and micro enterprises the ratio is a concern remaining below 1 since FY18 onwards. So prior to Covid as well, these sectors had a deteriorating debt servicing ability,” the study said.
Industry wise, aviation, consumer durables and hospitality are still facing considerable risk, post-Covid induced slowdown. However, few infra sectors such as capital goods, iron and steel, construction have better interest coverage ratio.
Interest coverage ratio improved in FY21 due to drop in repo rate and WALR, and a similar trend continued in FY22.
In the last financial year, despite a moderation in operating margin (Operating profit/Net sales), interest coverage of companies improved, clearly reinforcing the view that RBI’s accommodative policy supported this trend.
Operating profit of the companies has grown at a compound annual growth rate of 8.4 per cent, while interest has increased by 4.8 per cent in the past five years.
The five-year average of interest cover of companies has been 4.8. (IANS)