Indian Companies Who’s Profits Are Dwarfed by Interest Outgo
The statistical guidelines
A study showed that more than 50 percent of listed companies in National stock exchange are struggling growth; their interest outgo is significantly higher than their Net Profits. The companies have reported lower PAT compared to their interest outflow.
The test involves 1700 companies listed under the National stock exchange. More than 600 companies that have reported profit in FY17 June quarter have ended up paying huge interest cost which has eaten into the company’s real profit margins.
RBI Intervention
Under Raghu Ram Rajan’s regime the RBI has cut its bench mark lending rate by 150 basis points in the last 18 months however banks have passed on only 90 basis points to their customers due to over loaded NPA numbers.
India’s Industrial production(IIP)have been significantly low in the past 2 years as it is not been able to break a hurdle of 6 percent in recent times as shown in table from last 6 months. IIP numbers was at peak of 20% during 2008 to 2011 were interest rate was at lowest to 4%.
Months | IIP % |
June 2016 | 2.10 |
May 2016 | 1.10 |
April 2016 | -1.30 |
March 2016 | 0.30 |
Feb 2016 | 2.00 |
Jan 2016 | -1.50 |
Dec 2016 | -1.20 |
RBI’s excessive concern over fast rising inflationary numbers in the days ahead are denting the country’s overall growth prospects in future. India’s current inflation stands at 6.07% which is above the RBI’s target rate of 5-5.5%. While safeguarding the country from higher inflation numbers have taken a toll on India’s growth trajectory it could also be a signal to the government to bring about constructive reform measure in order to spur business rather than banking on monetary policies alone. Table shows that inflation has remained between 5-6.5 percent.
Months | Inflation |
June 2016 | 6.07 |
May 2016 | 5.77 |
April 2016 | 5.76 |
March 2016 | 5.47 |
Feb 2016 | 4.83 |
Jan 2016 | 5.26 |
Dec 2016 | 5.69 |
Fiscal Policy
While the Indian economy is striving for growth, the Government has matched its steps by launching lucrative schemes for startups, however at the same time the government must focus on existing companies who are over burdened by high cost of borrowing.
The BJP led Government has brought about revolutionary measures by successfully launching the GST into the financial system thereby making taxation a lot simpler and business friendly.
It’s high time the RBI focuses on current borrowing cost of country which remained at 6.5% and is surprisingly very high when compared to the existing rates in the United States and Europe. If India has to prove its mettle as the next growth engines of the global economy or match up to the likes of Chin, Japan or the other developed nations our bench mark lending rate have to have a competitive edge over these the developed economies of the world.
The Road Ahead
A probable solution to the to the current challenge that India is facing might lie in being prudent while approving loans to companies and should disburse each tranche in parts based on the inception of the project rather than a onetime disbursement. This will lower down the provisioning and bring down the risk of NPA (Non performing Assets). The bank will have higher liquidity and at the same time cost of borrowing will be lowered to provide overall boost to the economy.
List of top 30 companies that are struggling because of high cost of borrowing:
NSE Code | Interest In Cr | June 2016 PAT | Interest / PAT | Net Profit Margin |
57.14 | 2.80 | 2041% | 0.18% | |
179.64 | 10.88 |
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