Page 21 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.79, # 2, 2022, pp. 19-36

David Rodgers noted that, there is a close relation between credit losses of banks and
the interest burden of the business sector in Australia. Using econometric modelling
it was found that the relationship between interest burden and credit losses in the
economy was statistically significant. An increase in the interest burden increases the
risk at the borrower level. D.Rodgers defined the interest burden for the economy as
the ratio of interest payments to GDP (David, 2015). Marianne Gizycki's study found
that both corporate and household interest rates had an increasing effect on credit risk.
In the same study it was determined that increase in the share of interest in disposable
income of household increases the amount of impaired assets of banks.

As well as, Marianne Gizycki's research found that the increase in the share of interest
in the company's revenues increases the impaired assets of banks too. In other words,
there is a positive relation between impaired assets of banks and both the corporate
and household interest burden. Hence, it shows that there is a positive relationship
between the interest burden and banking risks (Gizycki, 2001). The lower interest
rates lead to lower loan losses (Michael Brei et.al, August 2019).

Francisco Palomino et.al studied the interest coverage ratio (ICR) which defined as
the ratio of earnings before interest and taxes to interest expenses. They considered it
as an indicator of the ability of a company to make interest payments using internal
cash flows. As said in this study the level of the ICR can be considered an important
indicator of financial distress for government policy decisions. As well as some
studies found that the transmission of monetary policy becomes stronger while ICRs
are low (Palomino et al., 2019). An increase in interest rates worsens balance sheets
of borrowers directly by diminishing cash flows net of interest and by reducing the
value of collateral assets in its turn as well. Consequently, it results in strengthening
the overall influence of monetary policy on borrowers' spending and this process can
also be encountered indirectly too. (Gertler M., Gilchrist S., 1994).

Note that the increase in the interest burden should be optimal in the context of
economic growth and fiscal sustainability too. In addition, the chances of companies
depended on bank, as well as start-ups and non-exporters to continue operating,
especially in times of crisis, are more affected by changes in interest burden (Guariglia
et al., 2015). The interest burden triggers fiscal regulation in terms of solvency.
D.Xavier and K.Tidiane estimated the ratio of interest payments to government
revenue, tax revenue, or GDP as an interest burden. Then, the relationship between
the primary balance (i.e. net lending or net borrowing excluding interest expenses) in
percent of GDP and the interest burden has been studied through panel regression

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