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Corporate India’s ability to service interest improved slightly in the December quarter, a Mint analysis showed, possibly indicating the success of recent central bank measures to improve monetary policy transmission.

The ability of 329 companies on the BSE 500 index to repay loans, as measured by interest coverage ratio (ICR), rose to 3.79 times in the December quarter from 3.67 times in the September quarter and 3.77 times a year ago, Capitaline data showed. The review excluded banks, financials, and oil and gas companies, which follow a different accounting procedure.

A high ICR indicates greater ability to meet interest obligations from operating earnings. The ratio is derived by dividing a company’s earnings before interest, tax, depreciation and amortization with its interest cost.

The uptick in ICR follows five repo rate cuts by the Reserve Bank of India (RBI) between February and October last year. The central bank reduced the key policy rate by 135 basis points (bps) in 2019, but has remained on pause since December.

According to RBI data, the median one-year marginal cost of funds-based interest rate (MCLR) moved from 8.8% in January 2019 to 8.25% in January 2020. State Bank of India (SBI), the country’s largest lender, cut its one-year MCLR by 70 bps to 7.85% between February 2019 and 2020.

Interest outgo of the 329 companies was 11.82% in the December quarter, compared with 15.36% in the September quarter and 28.85% in the three months ended December 2018, a Mint analysis showed.

Growth in net profit before tax, led mostly by higher other income and cheaper raw material costs, improved to 12.59% in the December quarter from a 13.70% decline in the September quarter and a 14.56% drop in the quarter ended 31 December 2018.

There has not been a significant material transmission of lower interest rates to companies, according to Pankaj Pandey, head of research at ICICI Securities Ltd. “A few factors like cost-control initiatives in challenging demand environment with commodity tailwinds helped companies cut interest costs in the third quarter to some extent. Debt levels have not risen as companies have restricted their spending," he said.

While some of the improved interest servicing ability could have stemmed from the transmission of RBI rate cuts, corporate deleveraging also played a part. Moreover, credit growth, especially to companies, has declined steadily, and experts said that deleveraging has affected it as well.

RBI governor Shaktikanta Das has acknowledged that deleveraging or reduction in borrowing by companies is evident. “Our analysis also showed that there is evidence of some amount of deleveraging during the first half of this financial year. The proportion of available funds that was used to reduce the long-term and short-term borrowing during the first half of 2019-20 was 11% and 4.2%, respectively," Das said on 16 December at the India Economic Enclave organized by the Times Network.

Categorizing company borrowings into “very large credit offtake" (aggregate debt above 5,000 crore) and “large" ( 100-5,000 crore), an RBI analysis showed that so far, the former category consists of a relatively narrow set of firms. Comparing March 2018 and March 2019 figures, RBI found that, of the 148 and 161 firms, respectively, that were part of the very large credit offtake category in the two years, 126 firms were common. “In terms of the financial leverage metric, large corporates steadily deleveraged," RBI said in its Financial Stability Report of December.

According to Soumya Kanti Ghosh, SBI group chief economic adviser, for FY19 the reduction in debt for top 10 companies was around 2.2 trillion, a large part of which could have been used to repay banks. “Clearly, repayments have far outstripped disbursements resulting in negative credit expansion," Ghosh wrote in a 16 October note.

According to ICRA Ltd, ICR adjusted for sectors with relatively low debt levels (IT, FMCG and pharma) witnessed an annual weakening and sequential improvement to 3.9 times from 3.5 times in Q2 FY20 and 4.1 times in Q3 FY19. “Sectors like aviation, oil and gas, and construction saw significant increase in interest costs on an annual basis on account of the same. Stressed sectors like iron and steel, construction, power and telecom reported further YoY (year-on-year) weakening of interest cover during the quarter," it said in a report on 6 February.

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