Corporate India’s credit profile has worsened during the six months through September as the value of debt downgraded by ratings firms tripled from a year earlier.
The total debt downgraded jumped to Rs 1.38 tripled in the first half of 2019-20 from Rs 39,000 crore a year year, ratings firm Crisil said in its semi-annual credit quality report.
This is the highest value of downgrades recorded in any half-year since 2015-16 when the Reserve Bank of India initiated an asset quality review on banks.
This is an indication that credit quality pressures intensified for India Inc. during the period driven by a global and domestic economic slowdown, a sharp fall in consumption demand and slower government spending, Crisil said.
“Across rating categories, entities with higher leverage saw more downgrades as pressure from the demand slump intensified. Declining profitability and stretch in working capital cycles also were reasons for the downgrades,” said Somasekhar Vemuri, senior director at Crisil Ratings.
“On the other hand, those with lower leverage withstood the demand-side challenges better,” Vemuri said.
The Crisil report also pointed out a positive side. It said that deleveraging by companies led to more rating upgrades (529) than downgrades (438). However, the credit ratio of upgrades to downgrades fell for the first half of 2019-20 to 1.21 times from 1.73 for 2018-19. A ratio of more than 1 shows that more debt was downgraded than upgraded.
The report also said that even after a year since non-bank lenders began facing a funding squeeze, challenges persist for those with wholesale-oriented loan books. It pointed out that despite an improvement in credit flow and asset-liability management, access and cost of funding will remain the key metrics to be monitored.
For the banking sector, it highlighted that banks’ credit will grow around 12% this fiscal year from around 5% in FY17 led by rise in credit to the retail segment as well as small and medium enterprises.
Non-performing assets are also likely to decline from the 9.3% at the end of March 2019. This is because of fewer fresh slippages, faster recoveries under the bankruptcy law and government’s capital infusion into state-run banks.
Gurpreet Chhatwal, president at Crisil Ratings, said the key factors to be monitored are how well demand recovers after a good monsoon, a cut in corporate tax and faster release of Goods and Services Tax refunds.
“We remain cautious about the credit outlook for the second half because demand pressures persist,” Chhatwal said.