This is assuming that commercial banks will hike their lending rates by an identical margin to protect the spread between their cost of funds and earnings on loans. If the banks raise their lending rates by a higher margin, corporate India will end up taking a bigger hit.
Data collected from Capitaline Plus, a corporate database provider, show that India Inc has borrowings of over Rs 400,000 crore in the form of secured and unsecured loans on its books.
Excluding the foreign currency loans of Rs 53,000 crore, domestic borrowings are to the tune of Rs 3,47,000 crore. A 50 basis point rise in the interest cost will translate into close to Rs 1,750 crore as additional interest burden.
The impact of the rising rates is already visible. The interest burden of 571 companies that have so far declared their first-quarter results, has increased by 26 per cent.
These companies had paid Rs 708 crore more interest to Rs 3,479 crore during the April-June quarter against Rs 2,771 crore paid in corresponding quarter of 2005.
As a percentage of net profit, however, interest cost has not gone up as these companies have put up a better show. Interest cost accounted for 15.6 per cent aggregate net profit in the June 2006 quarter, compared with 16.46 per cent in the June 2005.
These 571 firms have posted a 32 per cent rise in aggregate net profit to Rs 22,287 crore against Rs 16,831 crore in the previous year.
During 2005-06, the interest burden of 3,019 companies increased by 4.81 per cent to Rs 29,771 crore (Rs 28,404 crore). Interest cost accounted for 23.5 per cent of the net profit of these companies in 2005-06 against 25.9 per cent in 2004-05. These 3,019 firms had posted Rs 1, 26,943 crore net profit in 2005-06 against Rs 1, 09,861 crore in the previous year.
The total borrowings of corporate India consist of short-term working capital loans, secured project loans, institutional loans, debentures and fixed deposits.
With the rates rising, along with bank loans, the cost of other financial instruments will also go up. Firms will also have to pay more for new loans.
Private sector petrochemical giant Reliance Industries' borrowing was to the tune of Rs 21,866 crore in March 2006. Pubic sector companies like Indian Oil Corporation, NTPC and ONGC have substantial borrowings on their balance sheets.
The rates started going up from the last quarter of financial year 2004-05 with the Reserve Bank of India hiking its reverse repo rate by 25 basis points to 4.75 per cent in the last week of October 2004. That was the first of a series of six rate hikes.
In 2005-06, the RBI policy rate moved up by 75 basis points to 5.5 per cent through three hikes in April and October 2005 and January this year. Since then, there have been two hikes of 25 basis points each on June 8 and July 25, taking the reverse repo rate to 6 per cent.
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