Stressed companies are deleveraging fast and the number of ‘ weak’ companies in the economy is declining, according to the bi- annual report of the Financial Stability and Development Council ( FSDC), released by the Reserve Bank of India ( RBI).
‘Weak’ companies are those that have interest coverage ratio of less than one. Interest coverage ratio is profit before interest and tax divided by interest expense.
Despite this, the risks to the banking system have “ worsened significantly,” the report noted, as companies may not be paying back loans fast enough. “ Risks to the banking sector have sharply increased since the publication of the previous stability report in December.” The report added that this was due to deteriorating asset quality and lower profitability.
RBI conducted its asset quality review ( AQR) last year to make banks disclose bad loans and make provisions for them. This increased the quantum of non- performing loans and provisioning significantly in the December 2015 and March 2016 quarters.
While the deleveraging process of corporate borrowers has begun, the capacity of companies to repay would move up only gradually, given the slow increase in income and business growth.
The report analysed 1,800 to 2,600 listed private non- financial companies to capture the trend. It says within the sample size, the proportion of leveraged companies that have negative net worth or debt- to- equity ratio of more than two declined sharply from 19 per cent in March 2015 to 14 per cent in March 2016. These companies’ share in total debt also declined from 33.8 per cent to 20.6 per cent.
Similarly, the proportion of ‘ highly leveraged’ companies, those having debt to equity ratio of more than three, declined from 14.2 per cent to 12.9 per cent in the sample size, with the share of these companies in the total debt coming down from 23 per cent to 19 per cent, the report said.
However, a more detailed analysis of the corporate sector’s performance with a larger sample of companies obtained from Ministry of Corporate Affairs showed that profitability of both public and private companies improved in 2014- 15, compared with 2012- 13, while the leverage ratios increased.
“Debt servicing capacity measured in terms of the interest coverage ratio (ICR) improved for private limited companies whereas it remained almost the same in case of public limited companies,” the report said.
The analysis also shows that the share of ‘ weak’ companies declined to 15 per cent as on March 2016, compared with 17.8 per cent in March 2015.
Business Standard New Delhi, 29th June 2016
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