Rate cut could save India Inc Rs 6,300 crore in interest outgo

BSE 500 firms spent Rs 1.74 lakh crore on interest payments at an average rate of 6.9% in FY16.

Corporate India couldn't have asked for a better Diwali gift from new Reserve Bank of India Governor Urjit Patel. His decision to cut the benchmark interest rate by 25 basis points could save companies around Rs 6,300 crore in interest outgo on an annualised basis. This would push BSE 500 companies' combined net profit by around two per cent over the next four quarters.

In all, BSE 500 companies, ex-banks and financials, spent around Rs 1.74 lakh crore on interest payments at an average interest rate of 6.9 per cent in FY16. After the cut, the interest payment would decline to Rs 1.67 lakh crore on an annualised basis, provided lenders pass-on the rate cut to borrowers and there is no incremental addition to corporate debt over the next four quarters.

BSE 500 companies, ex-financials, were sitting on gross debt of Rs 25 lakh crore. Trends in the debt and interest cost suggest that the borrowing cost has been in decline for the past two years, having peaked around 7.1 per cent on average in FY15.

The analysis is based on gross debt and interest payment of 413 companies. The sample excludes listed subsidiaries of listed holding companies to weed out double counting.

The biggest gainers would be the country's top business groups and public sector companies. For example, the country's top 10 family-owned business groups (in terms of revenues) were sitting on gross debt of Rs 10 lakh crore at the end of March. The league table is led by the Tata's, with group companies' combined debt of around Rs 2.4 lakh crore, followed by the Mukesh Ambani group (around Rs 1.96 lakh crore) and AV Birla group (Rs 1.6 lakh crore).

The cut could potentially result in top-10 business groups saving nearly Rs 2,500 crore in interest cost over the next 12 months. Together, these top business groups spent Rs 61,218 crore on interest payment in FY16 up around five per cent from a year ago.

Central public sector companies would also big gainers. Together, they were sitting on combined gross debt of Rs 5.5 lakh crore in FY16, which cost them Rs 26,800 crore in interest payment last in FY15.

In the past, gains to corporates from cuts have been limited as banks have not passed on the benefits. Experts are hoping for better transmission going forward. "In the coming months, policy transmission is expected to improve further as the shift to MCLR (marginal cost of funds-based lending rate) for pricing loans will also bring down lending rates and favourable liquidity conditions managed by RBI will ease any liquidity constraints for banks," writes Dharmakirti Joshi, chief economist at CRISIL, in his report on the latest credit policy.

According to CRISIL estimates, base rates of banks have come down only about 60 bps and MCLR has come down 10 bps since April 2016, a fraction of the cumulative cut in benchmark rate by RBI. In this rate-cutting cycle that began in January 2015, RBI has brought down the repo rate by 175 bps. One basis point is one-hundredth of a per cent.

ICRA, however, remains cautious. "Central bank's liquidity-neutral stance amidst incomplete transmission of past policy action as well as recent reduction in various small savings rates, does provide some room for banks to lower lending rates. However, with bond yields already at multi-year lows, further softening from current levels is likely to be limited," writes Karthik Srinivasan, senior vice-president, co-head of Financial Sector Ratings, ICRA.

This could potentially spoil corporate India's party.