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RBI Data Shows Steep Drop In Debt Servicing Ability Of Indian Firms

Aggregate interest coverage ratio of non-government non-financial firms dropped sharply in Q3 FY17.



Workers load processed sacks of rice onto a truck at the New Grain Market in Karnal, Haryana, India (Photographer: Prashanth Vishwanathan/Bloomberg)
Workers load processed sacks of rice onto a truck at the New Grain Market in Karnal, Haryana, India (Photographer: Prashanth Vishwanathan/Bloomberg)

The debt burden for Indian companies rose sharply in the third quarter of the current fiscal, leading to a drop in the ability of these companies to service their debt. Data released by the Reserve Bank of India on Thursday shows a surprising drop in the interest coverage ratio of Indian firms, contrary to the belief that the Indian corporate sector is starting to deleverage, albeit slowly.

The data, which covers a sample of close to 2,800 listed non-government, non-financial (NGNF) companies, shows a drop in the aggregate interest coverage ratio from 3.8 times in Q2 FY17 to 2.9 times Q3 FY17. In the comparable quarter last year, the interest coverage ratio stood at 3 times.

Interest coverage ratio calculates a company’s ability to service interest on its debt by dividing a company’s earnings before interest and taxes (EBIT) by the company’s interest expenses during the period. The sharp drop in interest coverage ratio was also accompanied with a drop in cash coverage ratio from 4.9 times to 3.8 in the same period. Cash coverage ratio measures the liquidity available to a company for paying interest versus total interest liability.

At the same time, the interest burden of companies as a ratio of sales rose from 4.1 to 4.9.

RBI Data Shows Steep Drop In Debt Servicing Ability Of Indian Firms

“Interest expenses grew sharply in Q3 2016-17 as compared with the previous quarter at the aggregate level as well as for the manufacturing and the services (other than IT) sectors,” the central bank said in the press statement accompanying the data release without attributing a reason to this. Rating agency executives that BloombergQuint spoke to were unable to immediately pinpoint a reason for the decline in interest coverage ratio.

On a sectoral basis, the manufacturing sector saw its interest coverage ratio fall to 3.4 in Q3 FY17 from 4.4 in Q2 FY17, followed by the services sector which saw a similar drop from 2.6 times in the second quarter of the financial year 2017 to 1.6 times in the third quarter.

“Within the manufacturing sector, textiles, motor vehicles and the iron and steel industries experienced higher growth of interest expenses. In the services (other than IT) sector, higher interest expenses were attributable to the telecommunication industry,” the RBI said in its release.

The telecommunications sector, which is in the midst of a scenario of increased competition and consolidation, saw its interest coverage ratio fall below one, the RBI said. An interest coverage ratio of less than one indicates that the company doesn’t have enough resources to pay back the interest on its existing debt.

RBI Data Shows Steep Drop In Debt Servicing Ability Of Indian Firms

This trend of declining interest coverage ratio was observed across companies of all sizes, according to the RBI data.

RBI Data Shows Steep Drop In Debt Servicing Ability Of Indian Firms

The performance in the third quarter appears to reverse trends observed till September 2016. In the December edition of its Financial Stability Report, the RBI noted that Indian firms appear to be “deleveraging”.

“During the period of September 2015 to September 2016, 42.2 per cent of NGNF listed companies in the select sample witnessed deleveraging, while the total borrowings remained the same for another 17.3 per cent of the companies,” the RBI wrote in its FSR. But the central bank also raised the alarm on large borrowings by the remaining companies which more than nullified the effect of deleveraging by other companies.

“Though the total borrowings increased for only 40.4 per cent companies, the growth of total borrowings of such companies was much higher than the reduction in total borrowings of companies which deleveraged, thus influencing the total borrowings of the companies in the sample,” said the RBI in its December review.