Debt-equity ratio stable but solvency ratio worsens
While risks to the corporate sector showed signs of moderation last year, having increased after the global financial crisis in 2007-08, the sector was nevertheless vulnerable to weaker demand and the ability to service debt had weakened, the Reserve Bank of India’s (RBI) financial stability report (FSR), released on Tuesday, noted.
Moreover, risks to the country’s banking sector, the central bank observed, had risen since December 2015, when the last FSR was published, primarily due to a further deterioration in asset quality and low profitability. Stressed assets of state-owned lenders, which include both non-performing assets (NPAs) and restructured loans, rose to 14.5% in March 2016 from 14.1% in September 2015, the RBI said in the report. Stress tests conducted by the central bank suggest that under the baseline scenario, the gross non-performing ratio may rise to 8.5% by March 2017 from 7.6% in March 2016. Should the macro situation deteriorate, the gross NPA ratio could rise to 9.3%.
The RBI opined that it was important to pursue sound domestic policies and structural reform given the increasing impact of prevailing “uncertainties and dynamics” in the rest of the world on India.
The debt-to-equity ratio for a sample of firms — drawn from a universe of 2,600 non-government, non-financial or NGNF listed companies — remained more or less stable at 0.38 in the second half of 2015-16 compared with the first half but the solvency ratio worsened to 12.9% from 14.5%, the central bank’s study showed.
The central bank’s analysis of the corporate sector showed the share of ‘leveraged’ companies (those either with negative net worth or debt to equity ratio greater greater than or equal to 2) dropped sharply from 19% in March 2015 to 14% in March 2016.
Moreover, their share in the total debt also declined from 33.8% to 20.6%. Similarly, the proportion of ‘highly leveraged’ companies (‘leveraged’ companies with debt-equity ratio greater than or equal to 3) declined from 14.2% to 12.9%.
“An analysis of the current trends in debt servicing capacity and leverage of ‘weak’ companies (interest coverage ratio (ICR) less than 1) was undertaken using the same sample, indicated some improvement in 2015-16,” the report said.
According to the report, 15% of companies were ‘weak’ in the select sample at end March 2016, compared with 17.8% in March 2015. The share of debt of the ‘weak’ companies also fell to 27.8% of total debt in the second half of 2015-16 from 29.2% in the second half of 2014-15. “However, the debt equity ratio of these ‘weak’ companies increased to 2.0 from 1.8,” it added.
Apart from listed companies, the central bank has also studied corporate performance using a part of the large database of the ministry of corporate affairs (MCA) covering 16,923 NGNF public limited companies and 2.37lakh non-government, non-financial private limited companies for FY14 and FY15.
These companies from the MCA database were analysed to identify the ‘weak’ and ‘leveraged weak’ companies and their share in total debt and bank borrowings. The analysis shows that 4,151 (24.5%) public limited companies and 61,194 (25.8%) private limited companies were ‘weak’ in the respective select sample in 2014-15. The debt-equity ratio stood at 3.3 for public limited companies and 1.6 for private limited companies, which deteriorated from 2.5 and 1.4, respectively, in the previous year.
“The profitability of both public and private limited companies, in general, improved in 2014-15, while the leverage ratios indicated increasing trends,” it said, adding that the debt servicing capacity measured in terms of the ICR improved for private limited companies whereas it remained almost the same in case of public limited companies.