India Inc's capacity to repay debt worse than 2008!

India Inc, like the Indian economy, is not having a great time. Slowing growth and sticky interest rates have meant the debt servicing ability of the Indian companies have gone down, Mint reports.

Debt servicing ability of a company is derived from the interest coverage ratio which is used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) of one period by the company’sinterest expensesof the same period. The lower is the ratio, the higher is the interest debt for the company.

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Now, Mint says, for 241 companies from the BSE-500 index that have declared March quarter earnings so far, this ratio comes at 4.9 times. This is the lowest since the financial crisis of 2008. The sectors that are affected the most are real estate, power, telecom and infrastructure.

And the warning comes from Sandeep Singhal, co-head of institutional equities at Emkay Global Financial Services who is quoted as saying, “This time around, things could be far worse than the financial crisis of 2008-09.”

And matters could get worse as there is no sign of interest rates softening further. The Reserve Bank has already cut policy rates by 50 bps (100 bps=1 percent) and has indicated that unless fiscal deficits and inflation are not adequately tamed, it will not cut rates further. The consumer price inflation went up to double digits this month and headline inflation rose to 7.23 percent in April from a year earlier.

So with high interest rates and falling sales and profits in a slowing economic growth, the situation might get worse.