The big burden of bank loans on small businesses
Small- and mid-cap companies are struggling to service their debt more than their big rivals despite historically low interest rates and a modest recovery in demand, indicating an unbalanced recovery for India Inc.
A Mint analysis of the June quarter earnings of medium and small businesses showed that the interest coverage ratio (ICR), a measure of how easily a company can pay interest on its debt, has declined compared to the previous March quarter. A lower ratio indicates a higher debt burden.
The debt service ratio of the 68 members of BSE Midcap and the 530 members of the BSE Smallcap index deteriorated to 3.78 times and 3.26 times in the June quarter of FY22, respectively , compared to 4.13 times and 3.69 times, according to data from Capitaline. The analysis excludes banks, finance companies and oil and gas companies. In contrast, for 34 members of the NSE Nifty Index, the ratio rose to 6.32 times in the June quarter from 6.11 times in the previous three months.
India’s biggest companies have extended their lead over smaller rivals since the covid outbreak last year by acquiring companies, cutting debt, expanding market share and spending heavily on technology to reach the customers amid the disruption caused by the lockdowns.
Experts said lower profitability in the June quarter due to the second wave of the pandemic hurt companies’ ability to service debt, but smaller companies were hit harder than theirs. larger counterparts.
“For small and medium enterprises, absolute borrowing increased even though the credit guarantee scheme came with a lower interest rate. Consequently, their interest charges increased due to the higher amount of borrowings. Moreover, even when we look at corporate earnings, the improvement is for large corporations. However, the smaller ones were affected as their turnover did not reach 2019 levels,” said Madan Sabnavis, chief economist, Care Ratings.
While the overall interest cost of BSE small cap companies in the June quarter declined sequentially, their earnings fell to a greater extent as the lockdowns, albeit localized, disrupted the chains procurement and affected cash flow. Many small businesses took on more debt to ride out the second wave of the government’s sovereign-guaranteed lending program: Emergency Credit Line Guarantee Scheme.
“With demand contracting and earnings correspondingly weakening, credit metrics weakened for most sectors on a sequential basis in the June quarter. However, the impact on earnings was much larger. weak this year, and thanks to the benefits of a lower interest rate regime, deterioration in credit metrics has been relatively limited from prior year levels,” said Shamsher Dewan, Vice President and Group Head, Corporate Notes, Icra Notes.
The interest coverage ratio of Icra’s sample of companies, adjusted for relatively low-leverage sectors such as IT, fast-moving consumer goods and pharmaceuticals, improved during the quarter of June to reach 4.3 times from a year earlier, although it moderated sequentially from 4.8 times.
A few large companies in the metals, autos and cement sectors have reduced their leverage to some extent over the past two quarters. However, such deleveraging hurts banks’ credit growth, experts said.
“The fact that large and medium-sized companies are deleveraging is also the reason why credit growth has stagnated. After seeing the previous rounds of bad loans, bankers are skeptical of lending to poorly rated companies, but the fact is that the higher rated ones prefer to borrow from the markets at a lower interest rate,” said a senior banker. on condition of anonymity.
According to Sabnavis, deleveraging is mainly practiced by large corporations, which use their surpluses to pay down debt instead of investing. “These are the new loans that we should be looking at and their quality will be driven by economic performance. Currently, with little investment, the demand for funds is low,” Sabnavis said.
The RBI has cut its repo rate by 115 basis points since the outbreak of covid-19 in March last year and has maintained a dovish stance.
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