Interest Burden On Corporates To Surpass Pre-Covid Levels In FY24

India Ratings and Research (Ind-Ra) expects interest burden on corporates to surpass pre-Covid levels in value terms, increasing 30% in FY24 compared to FY22.

Therefore, the tailwinds of a lower interest burden owing to a low interest rate regime and a reduction in debt are likely to be reversed in FY24, even without a meaningful increase in leverage, the rating agency said in a statement.

Ind-Ra, however, does not expect this to lead to broad-based credit deterioration, given the headroom available in terms of significant deleveraging and margin growth with several large corporates.

The rating agency said the cost of debt is likely to increase across all categories irrespective of size of the corporate when comparing FY22 and FY24, in sync with the interest rate regime in the system. A sharp rise in interest rates and higher working capital financing are likely to increase interest outflows to 3.38 trillion rupees ($41.19 billion) in FY24 from 2.52 trillion rupees in FY22, it added.

Ind-Ra said the Reserve Bank of India has increased the repo rate to 6.5% from 4% between March 2022 and April 2023, whereas banks’ marginal cost of funds based lending rate (MCLR) on an average for outstanding loans has risen to 9.67% from 8.72%.

The rating agency said interest rate transmission for large corporates gained traction in the second half of FY23 amid the repo rate hike, owing to the sharp deterioration in the banking system liquidity. The transmission of monetary policy in the banking system could intensify in FY24, driven by the sharp rise in banks’ MCLR, it added.

Ind-Ra said the drawdown from the reverse repo in FY23 to the tune of 5 trillion rupees until FY23 has enabled banks to address a surge in the gap between incremental credit and deposit, and this will not be available in FY24. Therefore, even if the policy rate remains stable for FY24, rates in the banking system will continue to face upward pressure, it noted.

The rating agency said it has factored a 25% increase in financing cost in FY24 from FY22 on extrapolating interest rates for the current fiscal year.

Ind-Ra said on an overall basis, earnings are to be moderately better in FY24, given the easing input prices coupled with moderate price hikes by corporates.

(Note: $1 = 82.0600 Indian rupees)

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