Non-performing assets (NPAs) are an ongoing headache for the banking sector. It is true that the quantum of NPAs defines the quality of assets in the system.

A new report by CARE analyses the significance of growing debt by gauging the build-up witnessed in specific companies and industries across the corporate sector and juxtaposing it with the debt servicing ability as defined by the interest cover ratio (ICR).

Madan Sabnavis, chief economist, and Rucha Ranadive, associate economist at Mumbai headquartered CARE Ratings, closely analysed a sample of 2,314 companies, excluding banks and finance companies. These were distributed by size of debt to figure out whether the overall health of the corporates can be gauged by narrowing down the sample to specific debt sizes.

“This will provide signals to the regulators on where to focus attention in terms of monitoring the vulnerability of corporate in terms of servicing debt,” Sabnavis and Ranadive say.

The sample companies had an outstanding debt of Rs 20.02 lakh crore as of March 2017. ICR, defined as the ratio of profit before depreciation, interest and tax (PBDIT) to interest payments, was calculated by the economists for FY2017 and nine months of FY2018 to ascertain whether or not there was any deterioration in these ratios over these two time periods.

For the aggregate sample the ICR was more or less stable at 3.90 for the nine months of FY2018 compared with 3.92 in FY2017, the report adds.

From the overall sample 1,272 companies that had outstanding debt of Rs 8.75 lakh crore witnessed an improvement in the ICR. “This indicates that 44% of the sample companies witnessed improved ICR this year,” says CARE.

“The balance 1,042 companies witnessed a decline in ICR and had outstanding debt of Rs 11.27 lakh crore.” For the nine months of FY2018, the ICR was higher than 1 for 1,736 companies with debt of Rs 15.23 lakh crore, while it was less than 1 for the balance 578 companies, which had outstanding debt of Rs 4.78 lakh crore, or 24% of the aggregate debt.

In FY2017, there were 1,790 companies with ICR of above 1 with outstanding debt of Rs 14.6 lakh crore, while the balance 524 companies had ICR of less than 1 with debt of Rs 5.42 lakh crore.

“Hence while the number of companies with ICR less than 1 has increased in 9M-FY18, the value of such debt has come down,” the report adds.

Off the 2,314 companies, there are 68 companies with outstanding debt of above Rs 5,000 crore as of March 2017. The outstanding debt of these 68 companies adds up to Rs 13.58 lakh crore, and accounted for roughly 2/3 of total debt of the corporate sector.

The ICR for this group of companies came down from 3.22 to 3.08 during this time period. Further, 23 companies with total outstanding debt of Rs 2.82 lakh crore had ICR of less than 1 for nine months FY2018. Of this Rs 0.72 lakh crore was in steel, Rs 0.67 lakh crore in telecom, Rs 0.38 lakh crore in engineering and Rs 0.24 lakh crore in textiles.

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