Has corporate India’s financial health improved?

Posted On Tuesday, 13 June 2017 10:54

bse-kxlEconomic growth in India has been hobbled by what has been termed the twin balance sheet problem excessive corporate debt, mirrored in the mounting bad loans of banks. Companies are reluctant to take on more debt as a result, while banks are wary of lending. Do the corporate financial results for the March quarter show any improvement in corporate balance sheets, any signs of breaking away from this logjam?

One important yardstick to find out whether the corporate debt problem is getting better is to look at the interest cover. Interest cover measures the extent to which a firm’s earnings are sufficient to pay interest charges. It is the earnings before interest and tax divided by interest charges. The higher the cover, the more comfortable can the firm pay its interest expenses. The Centre for Monitoring Indian Economy (CMIE) database shows a distinct improvement in the interest cover of the manufacturing sector, excluding petroleum products. Interest cover moved up from 2.6 times for the December 2016 quarter to 3.2 for the March 2017 quarter. It’s easy to figure out why banks lowered their interest rates substantially during the last quarter and this has been reflected in the financial results of BSE companies. One big reason for banks’ lowering interest rates, of course, is the huge influx of deposits as a result of demonetization, which led them to lower deposit rates as well as loan rates.

New source: livemintnews

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