The rating agency expects interest burden on corporates to surpass pre-covid levels in terms of value, increasing 30% in FY24 compared to FY22, with the cost of debt is likely to increase across all categories irrespective of size of the corporate.
“This is in sync with the interest rate regime in the system. A sharp rise in interest rates and higher working capital financing are likely to increase interest outflows to Rs 3.38 lakh crore in FY24 from Rs 2.52 lakh crore in FY22,” Ind-Ra said.
However, the rating agency does not expect this to lead to broad-based credit deterioration, given the headroom available in terms of significant deleveraging and margin growth with most large corporates.
The rating agency analysed interest costs on net basis of around 3,365 non-financial, debt-heavy corporates with a total debt of about Rs 36 lakh crore in the first half of the financial ended March 2023. The corporates have been bucketed into six segments based on the long-term and short-term debt amount.
On extrapolating interest rates for the current fiscal year, Ind-Ra factored a 25% increase in financing cost in FY24 from FY22, reflecting the increase in the benchmark repo rate by the Reserve Bank of India (RBI) to 6.5% from 4% between March 2022 and April 2023.
“Interest costs for all sectors will increase at a compounded annual growth rate of 16% between FY22 and FY24. “For the top debt-heavy sectors, interest costs will rise to Rs 2.84 trillion in FY24 from Rs 2.09 trillion in FY22,” the rating agency said.Interest rate transmission for large corporates gained traction in the second half of fiscal 2023 amid repo rate hikes, owing to the sharp deterioration in the banking system liquidity. Ind-Ra said that the transmission of monetary policy in the banking system could intensify in FY24, driven by the sharp rise in banks’ marginal cost of funding based lending rates. “The drawdown from the reverse repo in FY23 to the tune of Rs 5 lakh crore till FY23 has enabled banks to address a surge in the gap between incremental credit and deposit, and this will not be available in FY24. Therefore, even if the policy rate remains stable for FY24, rates in the banking system will continue to face upward pressure,” the rating agency said.