Corporate leverage down, debt lower: RBI

MUMBAI: Corporate sector performance has improved in the last one year as the proportion of leveraged companies has dropped and the amount of debt in companies’ books has also declined, Reserve Bank of India ( RBI) said in bi-annual financial stability report.

The proportion of both leveraged and highly leveraged companies has fallen in March 2016 compared to a year ago. Leveraged companies, which have a negative net worth or a debt to equity ratio of equal to or more than 2% have dropped to 14% of the RBI sample size in March 2016 from 19% in March 2015. The debt of these companies also dropped 20.6% of the total corporate debt compared to 33.8% last year.

The RBI’s sample consisted of between 1,800 to 2,600 non-government non-financial ( NGNF) listed companies. Highly leveraged companies which have a debt to equity of equal to or more than 3% declined to 12.9% from 14.2% with their share in the total debt down to 19% from 23%.

Sales growth for all these companies analysed by RBI increased 2.2% year-on-year, the highest in the last one year, while net profit increased 2.1%.

Iron and steel had the highest leverage with a debt to equity ratio of 105%, slightly higher than transport and more than telecommunications, construction and power sectors which are all debt laden according to the RBI.

The RBI survey described 24.5% public limited companies and 25.8% private limited companies were weak. The percentage of weak companies which were leveraged was higher for electricity, construction, iron & steel, real estate and textiles sectors.

“The leveraged weak companies with lower debt servicing capacity and high leverage may exert pressure on the already deteriorated asset quality of bank loans in adverse situations,” RBI said adding that banks had extended about 10.4% of total credit to these companies.

“The impact could be about 8% in case of assumed default by leveraged weak NGNF companies. However, a portion of bank credit to these companies could already be a part of the existing stressed advances of banks,” RBI said.