BackCredit ratio of Indian companies at decadal low in April-September
Crisil claimed that while the rate of upgrades plunged as expected with covid-19 crushing demand, the rate of downgrades did not surge as feared
PremiumAs expected, business disruption and fall in economic activity due to covid-19 crisis led to a weakening in credit profile of Indian companies in first half of financial year 2021. According to data released on Thursday, Crisil’s credit ratio of Indian companies for April-September was at 0.54, the lowest in more than a decade, with 296 downgrades and 161 upgrades. Credit ratio is number of upgrades to downgrades.
“Corporate credit profiles remain vulnerable even as demand claws back amid a raging covid-19 pandemic," it said.
However, Crisil added that while the rate of upgrades plunged as expected with covid-19 crushing demand, the rate of downgrades did not surge as feared due to cushions by proactive regulatory measures such as liquidity window made available through the corporate bond market, moratorium on debt servicing permitted by the Reserve Bank of India (RBI), and temporary relaxation in default recognition norms of credit rating agencies allowed by the Securities and Exchange Board of India (SEBI) .
High-resilience sectors such as pharmaceuticals had a credit ratio of more than one in the first half of this fiscal, led by steady demand and robust balance sheets. On the other hand, moderate- and least-resilient sectors saw downgrades far outnumbering upgrades, because of the discretionary nature of goods and services, and leveraged balance sheets for several of them.
Meanwhile, Icra had 582 negative rating actions in April-September period, which on an annualized basis accounted for 32% of its rated portfolio compared with the proportion of 23% in FY2020
Around half of the negative rating actions were downgrades for companies rated by Icra. As downgrades rose, the annualized downgrade rate touched a high of 17% in first half of FY2021 compared with the past five-year average of 10%. Icra upgraded the ratings of only 94 entities in first half of FY2021, reflecting an annualized upgrade rate of a mere 5%, compared with the past five-year average of 9%.
“This is hardly surprising considering the severity of the crisis and the synchronized impact it has had on economies, both domestic and global," Icra said.
For companies rated by Icra in H1 FY2021, the top five sectors—in terms of the count and the proportion of entities in the sector—that faced a negative rating action include textiles, real estate, hospitality, auto ancillaries and construction. All these sectors (barring Hospitality) were already facing a demand slowdown prior to the onset of covid-19 and the pandemic-induced disruption further amplified the adverse effects.
While negative rating actions in these sectors and the overall portfolio in general were high, there were lesser instances of defaults. Only 11 defaults were observed in Icra’s rated universe in H1 FY2021 compared with 83 defaults seen in FY2020.
“To a large extent, this is because many entities in Icra’s rated portfolio (27%) availed a moratorium on payments on their bank loan facilities as permitted by the RBI alleviating default risk during the period of moratorium. Even in the remainder of the fiscal, instances of defaults are expected to remain low as the stressed entities would likely seek a restructuring of loans from the lending institutions which may involve, inter alia, the pushing ahead of loan payments," it said in a note.
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