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Downgrade pressures for India Inc abate gradually

Regulatory pressure for banks to recognize bad loans has also led to a 30% jump in non-performing loans, according to Fitch Ratings. Photo: Ramesh Pathania/MintPremium
Regulatory pressure for banks to recognize bad loans has also led to a 30% jump in non-performing loans, according to Fitch Ratings. Photo: Ramesh Pathania/Mint

  • FY20 and FY21 marked a sharp rise in proportion of entities downgraded in Icra’s portfolio, compared to historical averages, but rating action trends since November 2020 suggest incremental downgrade pressures have ebbed

Mumbai: The credit quality of Indian corporates has seen two consecutive years of elevated pressures, but recent trends suggest that such pressures might be behind for businesses.

While on a full-year basis, both FY20 and FY21 marked a sharp rise in the proportion of entities downgraded in Icra’s portfolio, as compared to historical averages, the rating action trends since November 2020 suggest that incremental downgrade pressures have ebbed. At the same time, the proportion of rating upgrades has been on the rise over the past two quarters, rating agency Icra Ltd said.

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Icra downgraded the ratings of 483 entities in FY21, reflecting a downgrade rate of 14%, coming on the heels of an even higher downgrade rate of 16% seen in FY20. To be sure, the proportion was much higher than the preceding five-year average of 8%, reflecting the elevated credit pressures seen in the past two years.

According to the rating agency, ratings of 293 entities were upgraded by Icra in FY21 and accounted for 9% of the portfolio entities, a proportion similar to that seen in FY2020. Since November 2020, the credit ratio of Icra-assigned ratings, defined as the number of entities upgraded to that downgraded, has consistently remained upwards of one time each month. Prior to that, the credit ratio had remained consistently below 0.6 in each month since May 2019, it said.

K. Ravichandran, deputy chief rating officer, Icra, said the slowdown in consumption and investment demand, besides increased vulnerabilities of the wholesale-lending focused non-bank finance companies had significantly weighed on the credit profiles in FY20.

“The credit concerns had got amplified in FY21 in the wake of the covid-19-induced business disruption. But a broad resumption in economic activity, post the lifting of the lockdown, supported in ample measure by the fiscal and monetary policy interventions, has allowed businesses to recover, even as the recovery remains uneven thus far," said Ravichandran.

According to Icra, select sectors that experienced a healthy credit ratio in FY21 include power, pharmaceuticals, healthcare, and chemicals.

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