Corporates Stare At 25% Jump In Financing Cost This Fiscal, May Reverse Deleveraging

The rising interest rate burden, which is near the pre-pandemic levels and already up 30 per cent over FY22 levels, will force companies to reverse their deleveraging course this fiscal, according to a report.

The current fiscal is also likely to witness a 25 per cent increase in interest servicing cost, it added.

Top 3,360 plus non-financial, debt-heavy corporates have a debt burden of about Rs 36 lakh crore as of H1 FY23 and their interest outflow will jump to Rs 3.38 lakh crore in FY24 from Rs 2.52 lakh crore in FY22, according to an analysis by India Ratings.

To tame the stubbornly high inflation, the Reserve Bank has hiked the key policy rates by 250 bps so far since May 2022 and at 6.50 per cent it is already 25 bps 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, the agency said on Tuesday. 

The cost of debt is likely to increase across all categories irrespective of the size of the corporate in FY24 compared to FY22. A sharp rise in interest rates and higher working capital financing are likely to increase interest outflow to Rs 3.38 lakh crore in FY24 from Rs 2.52 lakh crore in FY22, said the report, which is based on the interest costs on a net basis of around 3,365 non-financial, debt-heavy corporates with a total debt of about Rs 36 lakh crore as of H1 FY23. 

On extrapolating interest rates for FY24, the agency has factored in a 25 per cent increase in financing cost in FY24 from FY22. While the repo rate has gone up to 6.5 per cent from 4 per cent between March 2022 and April 2023, banks' average lending rate (MCLR-based) for outstanding loans has increased to 9.67 per cent from 8.72 per cent.

Interest cost has increased for all sectors led by chemicals, crude oil, iron & steel and infrastructure in FY22. On average, there will be a CAGR growth of 16 per cent across all sectors between FY22 and FY24. For the top debt-heavy sectors, interest costs will rise to Rs 2.84 lakh crore in FY24 from Rs 2.09 lakh crore in FY22, as per the report.

Interest rate transmission for large corporates gained traction in H2 FY23 amid the repo rate hikes, owing to the sharp deterioration in the banking system liquidity. And the agency is expecting transmission to intensify in FY24, driven by the sharp rise in MCLRs. 

The Rs 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.