Crisil modified credit ratio (MCR), an indicator of the credit quality of the portfolio of companies it rates, increased to 0.88 in the first half of 2009-10, after dropping to a nine-year low of 0.86 in 2008-09. MCR is the ratio of upgrades to downgrades in credit rating, including reaffirmations in both categories.

Upgrades amounted to 1.3% of total outstanding ratings during the first half of 2009-10, higher than the previous six months (0.2%). Downgrades, on the other hand, stood at 5.9% of total outstanding ratings, lower than the 7.1% level in the preceding six months. The improvement in credit quality has been gradual, and has picked up in the last three months. This is evident from the fact that one-third of the downgrades happened in the month of April, but all the upgrades happened in second quarter of 2009-10.

The improvement is the result of several factors. Easing of monetary policy and government measures created more liquidity in the markets. This, along with a positive sentiment in the stock market, helped companies source funds more easily than before. Besides, the correction in commodity prices reduced working capital requirements of most companies, thus reducing debt. Profit generation has also been better. The aggregate net profit margin of 400 companies in the S&P CNX 500 touched a low in the third quarter of 2008-09, but bounced back in the next two quarters.

However, the reduction in commodity prices may not be sustained. Commodity prices have already firmed up in the last three months, indicated by the rise in input costs in most companies. Further, exchange rate volatility cannot be ruled out in the near term. Hence, Crisil believes that going forward, while the credit risk of companies operating in domestic markets such as power, roads, telecommunications, health and education will be more stable, those which are export-dependent (such as textiles) may bear a higher risk.

The rating firm also has it that the recovery this time around may be less smooth than in 1999-2000, when MCR jumped from 0.6 to 0.9, indicating a sharp recovery. Raman Uberoi, senior director, Crisil Ratings, Crisil Ltd says: “Last time, robust domestic and global demand were drivers of growth."

This time, improved credit quality is a function of easier access to funds and “demand growth on similar lines is yet to set in," Uberoi adds.

In other words, the improvement will continue to be gradual.