Debt-weighted credit ratio at five-year high but below 1: Crisil
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The quality of debt among Indian firms improved in the financial year that just ended, rating agency Crisil Ratings said on Monday.
In 2016-17, debt-weighted credit ratio—the ratio of debt held by firms whose debt ratings have been upgraded against that of firms whose ratings have been downgraded—improved to a five-year high of 0.88 time, against 0.31 time in 2015-16, Crisil said in a report.
The improvement was driven by firm commodity prices, stable macros, improving capital structure and lower interest costs, Crisil’s Ratings Round-up Fiscal 2017 said.
“The gradual improvement in credit quality is likely to sustain,” said Gurpreet Chatwal, president, Crisil Ratings.
Upgrades in FY17 were driven by consumption-linked sectors, while downgrades were led by investment-linked sectors. In FY17, there were 1,335 upgrades and 1,092 downgrades.
Crisil said the value of downgraded debt rose from around Rs40,000 crore in the first half of fiscal 2017 to Rs1.3 trillion in the second half of fiscal 2017—lower than the average debt downgraded in the past 10 semi-annual periods of about Rs1.5 trillion. On the other hand, value of upgraded debt increased from around Rs70,000 crore in the first half of fiscal 2017 to Rs90,000 crore in the second half of fiscal 2017—higher than the average upgraded debt in the past 10 semi-annual periods of about Rs60,000 crore.
The effect of demonetisation was severe in sectors which had a higher share of cash-based transactions, but though it was disruptive for demand and liquidity, Crisil expected its impact to be transient.
According to the rating agency, the credit quality of corporate India is gradually recovering, but its underpinning remains fragile as some sectors continue to struggle and several large firms remain highly indebted. As a result, gross non-performing assets (GNPAs) in the banking sector are expected to remain at elevated levels.
Crisil said the stock of GNPAs will rise further and stay at elevated levels. Recoveries would continue to be subdued, given that sizeable NPAs are in highly leveraged companies with stretched cash flows.
Several investment-linked sectors such as real estate and capital goods continue to face headwinds. Stress is also building in some microfinance institutions (MFIs) and major corporate houses with high indebtedness will continue to struggle.
On the brighter side, Crisil expects upgrades to outnumber downgrades in the near term, driven by improving domestic consumption.
“Several debt-intensive sectors such as metals (especially non-ferrous) and sugar are expected to see improvement in credit quality in fiscal 2018 because of rising prices. These trends would also reduce slippages to non-performing assets in the banking sector in fiscal 2018,” the report said.
“While Crisil expects credit quality to improve in fiscal 2018, the pace will hinge on progress in balance sheet deleveraging through asset sales, another normal monsoon, no further slowdown in India’s major trade destinations, pick-up in investment cycle, effective implementation of reforms (especially GST), the ability of MSMEs to withstand the increasing trend towards formalisation, and absence of any sharp swings in the rupee versus the dollar,” Somasekhar Vemuri, senior director, Crisil Ratings added.
In another report, ICRA also said that in FY17, the proportion of rating reaffirmations by the rating agency was at a multi-year high and the volume of debt downgraded also decreased sharply compared to year-ago period, but prospects of a definitive improvement in credit quality are not reassuring as yet.
Anjan Ghosh, chief rating officer, ICRA, said: “The proportion of rating reaffirmations by ICRA has been gradually rising over the past five years and stood at 84% in FY 2017 (82% in FY 2016). This is the highest proportion in many years, and substantially higher than the low point of 77% in FY 2012, when the weakening credit profile of a large number of entities in the wake of a decelerating economy, slowing corporate earnings growth and elevated debt levels had triggered a spate of rating downgrades.”