Despite the calls for higher transmission of the rate cut action take by the Reserve Bank of India (RBI), corporate India’s interest outgo has started to turn steady.
While an earlier analysis by FE that the interest cost for Indian companies dropped at its five-year low in FY15, the latest quarterly number also seems to suggest an abatement in the pace of interest outgo. Even as the impact of latest rate cut — the central bank reduced repo rate by 25 basis points to 6.5% on Tuesday — will take time to reflect, data compiled by FE shows that in the last five quarters, the y-o-y growth in interest cost has dropped from 8.6% to 0.9%. During this period ending December 2016, the central bank had brought down the policy rate from 8% to 6.75%. For the analysis we compiled a set of 3,200 Indian companies excluding banks & financials.
The decline in growth of interest cost may appear surprising especially because the transmission of the rate cuts by the banking industry is perceived to be low. For instance, during the period when the benchmark rates came down by 125 basis points, SBI, the largest Indian bank, having brought down its base rate by 70 bps to 9.3%.
Slowdown in business activity, tepid demand environment and lower capacity utilization could have impacted spending by companies also as stress on working capital cycle has come down.
The slow-down in interest outgo, albeit on a bigger base, seems to be an outcome of companies trying to diversify their borrowings in order to better manage the finance cost at a time when a strong revenue growth is difficult to come by. In the last one year, incremental substitution to corporate bank credit is happening at a fast pace. As a result, borrowings through corporate bonds and commercial papers (CPs) has exceeded loans disbursed by banks in FY16, according an earlier compilation by FE.
Especially, firms that carry good credit ratings have have utilised the corporate bond market extensively to fund their borrowing needs given the 50-100 bps difference between the bank borrowing rates and underlying yields in the debt market.Though the borrowing cost of firms in general does not seem to have come down substantially, especially those which are highly leveraged. Indeed, for a set of 25 listed companies that carry the highest debt and for which total debt figures at the end of September 2015 are available, the interest cost as a % of total debt has moved up by 40 basis points to 7.2% since September 2015. Although this proxy cannot give out an accurate gauge of cost of borrowing, the indicator for 15 of 25 companies either remained flat or moved up. In fact for names like, Reliance Power, Reliance Infra, Suzlon and Adani Port and SEZ it went up by 2 to 3 percentage points (ppt). In case of Bharti Airtel the cost went up by 4.4 ppt while Adani Enterprise witnessed the highest jump of 17 ppt.