Interest Coverage Ratio Of Indian Firms Second Lowest After Brazil
The interest coverage ratio of Indian firms is the second lowest among emerging economies after Brazil, showed the IMF's Financial Stability Report released on Wednesday. Interest coverage ratio is an indicator which measures the ability of a company to make good on its interest payments in time.
According to data released by the IMF, Brazilian firms had the lowest interest coverage ratio followed by India in 2016. Firms from Saudi Arabia, Poland and Malaysia had the strongest ratios.
As discussed in previous global financial stability reports, corporate debt service capacity is increasinglystrained, particularly in emerging Asia. The amount ofdebt-at-risk (debt of firms with earnings below theirinterest expenses) across emerging market economies isestimated at $430 billion, or 11 percent of the total corporatedebt, and remains elevated compared with earlieryears.IMF Global Financial Stability Report
The IMF added that excess corporate debt also increases risks to banks since a majority of this debt is financed by banks. $19.6 trillion out of $25 trillion in corporate debt resides on the balance sheets of domestic banks.
“...banking systems are vulnerable to further declines in growth or profits, particularly in countries at later stages of the credit cycle (such as India), where slowing credit growth and risks from elevated levels of nonperforming loans are most acute.”
Excess corporate leverage has been a key concern for the Indian economy in recent years and has been the underlying cause for a surge in bad loans across Indian banks.
Gross non performing assets across Indian banks rose to 8.7 percent of total loans as of June 2016 while total stressed assets rose to 12 percent. Some expect this to rise further. Credit Suisse in a report released September 27 said that stressed assets may rise to 16 percent of total loans.
There are some early signs of a turnaround in corporate credit quality.
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