The fall in credit ratios was across investment, export, and domestic-consumption-linked sectors. (Mint file)
The fall in credit ratios was across investment, export, and domestic-consumption-linked sectors. (Mint file)

Rating downgrades rise as economic slowdown intensifies credit quality pressure

  • Constrained access to funding affected credit profiles of entities across sectors, especially non-banks and real estate
  • The value of debt downgraded more than trebled to 1.38 lakh crore in the first half of fiscal 2020 from 39,000 crore in the year-ago period

Credit quality pressures intensified for India Inc in the first half of fiscal 2020, according to a report released by Crisil Ratings on Tuesday. The rating agency said that the pressure due to slew of factors such as global and domestic economic slowdown, sharp fall in consumption demand, and slower government spending. It said that constrained access to funding also affected the credit profiles of entities across sectors, especially non-banks and real estate.

As a result, Crisil’s debt-weighted credit ratio (value of debt 1 upgraded to downgraded) plunged to 0.25 time in the first half of fiscal 2020, compared with 1.65 times for fiscal 2019. The value of debt downgraded more than trebled to 1.38 lakh crore in the first half of fiscal 2020 from 39,000 crore in the first half of fiscal 2019. That’s the highest for any half since fiscal 2016.

The rating agency said that over the past five fiscals, the median gearing for Crisil-rated companies has improved from 1.3 times to 0.9 time, which reflects both, deleveraging that’s been underway and resilience to demand pressure. “That also explains why, upgrades continue to outnumber downgrades despite a sharp decline in Crisil’s credit ratio (upgrades to downgrades) for the first half of fiscal 2020 to 1.21 times – the lowest in the past six half-yearly assessments, and down from 1.73 times for fiscal 2019," it said in a report on 1 October.

According to Somasekhar Vemuri, Senior Director, Crisil Ratings entities with higher leverage across rating categories, saw more downgrades as pressure from the demand slump intensified. He added that declining profitability and stretch in working capital cycles also were reasons for the downgrades. “On the other hand, those with lower leverage withstood the demand-side challenges better," Vemuri said.

The fall in credit ratios for Crisil ratings was across investment, export, and domestic-consumption-linked sectors. Among investment-linked sectors, construction and allied accounted for over 30% of downgrades because of delays in project execution and stretched liquidity. Export-linked sectors reported a mixed performance, with pharmaceuticals (especially bulk drugs) continuing to benefit from supply constraints in China. Gems & jewellery and readymade garment exporters saw more downgrades because of constrained access to funding, lower export competitiveness, and weak demand.

Among consumption-linked sectors, auto components and other auto-related sectors accounted for 15% of the downgrades. However, the credit profiles of automobile manufacturers remained cushioned by strong balance sheets.

In the financial sector, a year since the funding squeeze began for non-banks, challenges persist for those with wholesale-oriented loan books. “While measures announced by the government and the Reserve Bank of India to improve flow of credit to the sector, and sharper focus of non-banks on their asset-liability maturity profiles, are welcome, access and cost of funding will remain the key monitorables," Crisil said.

For banks, non-performing assets are expected to continue to decline from the 9.3% estimated at the end of fiscal 2019, because of fewer fresh slippages and faster recoveries after the recent changes to the Insolvency and Bankruptcy Code. Infusion of capital, especially for public sector banks, and emphasis on retail credit book expansion, should drive growth.

Gurpreet Chhatwal, President, Crisil Ratings, “We remain cautious about the credit outlook for the second half because demand pressures persist. Going forward, how well demand recovers after a good monsoon, the sharp cut in corporation tax, faster and automated release of Goods and Services Tax refunds, and higher export incentives will be the key monitorable."

Similarly, Icra has downgraded ratings of 266 entities reflecting a downgrade rate of 14.6% which was significantly higher than the past five-year average of 8.8%. At the same time, instances of upgrades, at 170, witnessed a decline, as did the upgrade rate of 9.4% which was relatively lower than the past five-year average of 10.2%.

Volume of debt downgraded by Icra at Rs. 5.2 trillion in H1 FY2020 was higher than the figure of Rs. 3.2 trillion for the full year FY2019. “To a large extent, the sharp increase was attributable to the downgrade in debt of select financial sector entities, including housing finance companies, non-banking finance companies and private sector banks," said Icra on Tuesday.

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