Contact Your Financial Adviser Money Making MC
14
July 2017
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| Interest Coverage Ratio (The Total Investment & Insurance Solutions) |
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. The Total Investment & Insurance Solutions
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| Interest Coverage Ratio (The Total Investment & Insurance Solutions) |
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." The Total Investment & Insurance Solutions
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| Interest Coverage Ratio (The Total Investment & Insurance Solutions) |
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. The Total Investment & Insurance Solutions
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| Interest Coverage Ratio (The Total Investment & Insurance Solutions) |
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."The Total
Investment & Insurance Solutions
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