Companies may be forced to reverse their deleveraging efforts in the current fiscal year due to the rising interest rate burden, which has surged by 30% over FY22 levels and has now reached near pre-pandemic levels, PTI reported, quoting data from India Ratings. The current fiscal year is also likely to witness a 25% increase in interest servicing costs, it added.
The top 3,360 plus non-financial, debt-heavy corporates have a debt burden of about ₹36 lakh crore as of H1 FY23, and their interest outflow will jump to ₹3.38 lakh crore in FY24 from ₹2.52 lakh crore in FY22, as per the report.
To tame the stubbornly high inflation, the RBI has hiked the key policy rates by 250 basis points so far since May 2022, and at 6.50%, it is already 25 basis points more than the pre-February 2020 levels.
The tailwinds of a lower interest burden owing to a low-interest rate regime and a debt reduction are likely to be reversed in FY24, even without a meaningful increase in leverage, which, however, is unlikely to lead to any broad-based credit deterioration, given the headroom available in terms of significant deleveraging and margin growth with most large companies, according to the rating agency.
According to a report, the cost of debt is expected to rise for all categories of corporations in FY24 compared to FY22, due to a significant increase in interest rates and higher working capital financing.
The interest outflow is projected to increase to ₹3.38 lakh crore in FY24 from ₹2.52 lakh crore in FY22. The report analysed around 3,365 non-financial, debt-heavy corporates with a total debt of about ₹36 lakh crore as of H1 FY23.
On extrapolating interest rates for FY24, the agency has factored in a 25% increase in financing costs in FY24 from FY22. While the repo rate has gone up to 6.5 percent from 4 percent between March 2022 and April 2023, the banks' average lending rate (MCLR-based) for outstanding loans has increased to 9.67 percent from 8.72%.
Interest costs have increased for all sectors, led by chemicals, crude oil, iron and steel, and infrastructure in FY22.
On average, there will be a CAGR growth of 16% across all sectors between FY22 and FY24. For the top debt-heavy sectors, interest costs will rise to ₹2.84 lakh crore in FY24 from ₹2.09 lakh crore in FY22, as per the report.
The ₹5 lakh crore drawdown from the reverse repo in FY23 has enabled banks to address a surge in the gap between incremental credit and deposit costs, but this will not be available in FY24. Therefore, even if the policy rate remains stable for FY24, rates in the system will continue to face upward pressure, said India Ratings.
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