Banks are currently dealing with a challenging problem of stressed assets that has adversely impacted their profitability. As a precautionary measure, the Reserve Bank of India (RBI) wants banks to be prudent in their assessment of possible future stress in their asset portfolio, for which provisions needs to be made. In this regard, the RBI recently directed the banks to review various financial parameters of borrowers with the objective of framing policy for making provisions for standard assets. One such suggested parameter to be looked at closely is interest coverage ratio (ICR) that help understand and evaluate present and potential risks of borrowers. In general, the ICR witnessed a recovery in FY2017 after a continuous decline in the earlier period, says a research note.
In the report, CARE Ratings Ltd, says, "With regard to classification based on net sales, companies in the lower turnover bracket (net sales < Rs100 crore) had low interest cover and vice-versa. The classification of companies on their debt levels indicated that companies with higher debt (> Rs10,000 crore) were witnessed to have deteriorating debt servicing capabilities, which is a concern. Sectors like FMCG, automobile and ancillaries, pharmaceuticals and drugs, chemicals, consumer durables, construction material are better placed with regard to debt servicing capabilities."
In its analysis of 2,183 companies across industries excluding banks, oil exploration and refineries, finance and IT firms, the ratings agency found that interest payment capabilities did come down till FY2016, but improved marginally in FY2017. "For all years, the ICR is above 3 indicating comfortable debt servicing capability of the corporates in these years. However the interest coverage ratio declined considerably from 4.47 in FY2013 to 3.68 in FY2016, improved marginally to 3.84 in FY2017," it says.
According to the ratings agency, the recovery may be attributed to a combination factors. It says, "First interest rates have come down in FY17 which has lowered the outflow on this score. Also companies have been substituting cheaper credit points (CPs) with bank credit to take advantage of lower market rates compared with bank MCLRs. Second, overall borrowing by the corporate sector has been subdued due to a drop in investment. Third, as per CARE’s study on corporate results for FY2017, growth in profits also improved for a select set of companies relative to FY2016."