The Reserve Bank of India (RBI) today said Indian companies may find it difficult to repay loans as rising input cost is putting pressure on their profit margins.
"The outlook of the firms shows signs of weakness which can be attributed to rise in input prices, interest rates, slackening demand and some infrastructural constraints. Servicing of loans by them, therefore, may come under stress," said the RBI's Financial Stability Report (FSR).
It said the profit margin of the corporate sector has dipped, which indicates its reduced pricing power in the wake of rising raw material and input costs.
"The rising share of interest cost in sales as well as gross profits so far, implies that the impact of monetary tightening on the margins of corporates are now becoming visible," the RBI said.
The RBI has hiked rates 13 times since March, 2010, and industry believes the rising borrowing cost is putting pressure on margins as production is getting impacted.
It said restructured and impaired assets increased in telecom and power sectors. "The fact that incremental credit to these sectors was also high-- higher than the aggregate growth in banking sector credit-- called for careful monitoring of asset quality in these segments," the central bank said.
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The report further said that the bank's asset quality has come under pressure due to the adverse impact of inflation on growth and various other factors.
It said that higher interest expenses and higher provisioning requirements put some pressure on bank's profitability even as efficiency ratios continued to improve.
"Going forward, earnings may be further stressed due to the impact of high deposit rates, potential slowdown in credit growth and deterioration in asset quality," it said.
Further, India's external sector faces risks due to decreasing growth in world trade volumes and weakening global demand.
"Going forward, exports may moderate further if the slowdown in advanced economies persists," the RBI said.