The first six months of the current financial year have seen credit quality pressures intensify for corporate India due to a combination of factors like global and domestic economic slowdown, sharp fall in consumption demand, and slower government spending.
The latest analysis by ratings major Crisil, the value of debt that has been downgraded saw an over three-fold jump to ₹1.38 lakh crore in the first half of fiscal 2020, from ₹39,000 crore in the first half of the previous financial year. Incidentally, this is the highest for any half — first six months of a fiscal — since the financial year 2015-16.
Further, the rating entity’s debt-weighted credit ratio, which is the value of debt upgraded to downgraded, plunged to 0.25 in the first half of the current fiscal, a major drop from the previous financial year’s ratio of 1.65.
According to the ratings agency, constrained access to funding also affected the credit profiles of entities across sectors, especially non-banks and real estate.
“Across rating categories, entities with higher leverage saw more downgrades as pressure from the demand slump intensified,” Somasekhar Vemuri, senior director, Crisil Ratings said. “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,” Mr. Vemuri added. More importantly, the fall in credit ratios was seen across sectors linked to investment, export and domestic consumption.
Among investment-linked sectors, construction and allied accounted for over 30% of downgrades because of delays in project execution and stretched liquidity. Among consumption-linked sectors, auto components and other auto-related sectors accounted for around 15% of the downgrades. However, the credit profiles of automobile manufacturers remain cushioned by strong balance sheets.
Export-linked sectors reported a mixed performance, with pharmaceuticals (especially bulk drugs) continuing to benefit from supply constraints in China.
Gems and jewellery and ready-made garment exporters saw more downgrades because of constrained access to funding, lower export competitiveness, and weak demand.
CRISIL believes that in the financial sector, a year since the funding squeeze began for non-banks, challenges persist for those with wholesale-oriented loan books.
According to CRISIL, non-performing assets of banks are expected to continue to decline from the 9.3% estimated at the end of fiscal 2019 on account 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, as per the rating agency.
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, stated a release by the rating agency.
Meanwhile, the outlook also remains cautious as demand pressures continue even as the impact of the recent tax cuts and monsoon among other things would be monitored.
“We remain cautious about the credit outlook for the second half because demand pressures persist,” said Gurpreet Chhatwal, president, CRISIL Ratings.
“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,” he added.
