India Inc’s Q1 profit takes a hit amid high interest costs, demand slowdownhttps://indianexpress.com/article/business/economy/india-incs-q1-profit-takes-a-hit-amid-high-interest-costs-demand-slowdown-5913859/

India Inc’s Q1 profit takes a hit amid high interest costs, demand slowdown

Interest costs soared by 22.16 per cent to Rs 65,485 crore during the first quarter ended June 2019 even as demand slowdown started hitting India Inc.

The central bank and the government have been pushing for faster transmission of rate cuts, but banks are taking their own sweet time to pass on the benefits. (Representational Image)

The corporate sector ended up paying higher interest costs in the June 2019 quarter, even as the Reserve Bank of India (RBI) cut the key policy interest rate by 75 basis points (bps) between February and June this year and banks went slow in passing on the benefits of rate reduction to their customers.

Interest costs soared by 22.16 per cent to Rs 65,485 crore during the first quarter ended June 2019 even as demand slowdown started hitting India Inc.

On the other hand, a 11.97 per cent fall in the net profit of the corporate sector led to a 10.48 per cent decline in tax payment by corporates to Rs 49,895 crore during the June quarter, according to figures available from a sample of 2,179 companies. Operating margins of these companies were down by 34.30 bps to 14.84 per cent as the slowdown took its toll.

EXPLAINED

Rate transmission by banks yet to pick up pace

Including the 35 bps cut announced in August by RBI, the total reduction in repo rate has been 110 bps in 2019. However, the lower rates will be applicable only on fresh loans and will vary for companies as per their credit rating. Moreover, banks have been slow in transmitting the reduced repo rate on to their fresh loans. In addition to faster transmission, government intervention is the need of the hour.

“The 75 basis points cut in the first half of the calender year wouldn’t have made any impact on the corporates in the near term as these were old loans priced earlier. These loans would have been given years ago at a higher interest rate. Fresh loans issued to corporates would be priced lower according to their credit rating,” said a senior official of a nationalised bank.

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The RBI had cut the repo rate by another 35 bps in its latest monetary policy meeting earlier this month, thus making the total reduction to 110 bps in 2019.

A softening interest rate regime does not mean lower tax outgo for corporates which are battling legacy loan issues and slowdown in the economy. On top of this, some of the big corporates are in the defaulters list and banks were hesitant to lend, leading to choking of credit to some sectors. “Banks had tightened their lending norms to many sectors after the surfacing of the NPAs and the liquidity crunch in the NBFC sector,” the official said.

While addressing the annual general meeting of HDFC recently, chairman Deepak Parekh had said “banks are reluctant to lend and there has been a flight to safety where a select, few, high-rated NBFCs (non-banking finance companies) and HFCs (housing finance companies) have access to funding while for several others, access to credit has been chocked”.

The central bank and the government have been pushing for faster transmission of rate cuts, but banks are taking their own sweet time to pass on the benefits. “The stance of policy was changed from neutral to accommodative in June. These policy impulses have been transmitted through financial markets fully. The weighted average call money rate (WACR) has declined by 78 bps, market repo rate by 73 bps and 10-year benchmark G-sec yield by 102 bps,” RBI Governor Shaktikanta Das had said in his monetary policy statement.

Banks, on the other hand, have reduced their interest rates on fresh rupee loans by 29 bps so far (February-June 2019). “Our interactions with various stakeholders, including both public sector and private sector banks, indicate that steps are being taken by them on an ongoing basis to progressively lower their interest rates so that the benefits of the policy rate reductions are passed on to the economy. Accordingly, we expect higher transmission of monetary policy actions and stance by the banks in the weeks and months ahead,” Das said.

Though bankers are optimistic about bringing down the interest rates, it won’t give much benefit to old borrowers.”With improvement in liquidity position and reduction in deposit rates offered by banks, further reduction in lending rate are expected,” Sunil Mehta, managing director, Punjab National Bank, said. However, overall economic activity in the global market has slowed down and India is no exception.

Arun Singh, chief economist, Dun & Bradstreet India said, “In India, the manufacturing sector’s performance was a drag to the economic growth and will now have to brace for a further slowdown in services sector as well. In this regard, a series of rate cuts will provide required impetus to the economy.”

“The focus has to be more on transmission of the rate cut to the lending rate as a 75-bps cut in the repo rate has only translated into a 29-bps reduction in lending rate on fresh rupee loans during February–June 2019. Continued weak credit growth to the micro and small sector and negative export credit growth for more than two years will require special interventions which the government is trying to address,” he added.