CRISIL’s credit ratio for the first half of the current fiscal printed at 0.54, the lowest in more than a decade, with 296 downgrades and 161 upgrades. While this coincided with India’s sharpest GDP contraction on record, the credit ratio was cushioned to some extent by regulatory support.
Corporate credit profiles remain vulnerable even as demand claws back amid a raging COVID-19 pandemic. While the rate of upgrades plunged as expected with the pandemic crushing demand, the rate of downgrades did not surge as feared. That’s because credit profiles were cushioned by proactive regulatory measures such as liquidity window made available through the corporate bond market, a moratorium on debt servicing permitted by RBI, and temporary relaxation in default recognition norms of credit rating agencies allowed by SEBI. Without these, CRISIL’s credit ratio would have slid even lower.
High-resilience sectors such as pharmaceuticals actually had a credit ratio of more than one in the first half of this fiscal. 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.
Gurpreet Chhatwal, President, CRISIL Ratings, said: “We expect credit quality pressure on India Inc to persist in the second half of this fiscal. There has been a near-doubling of ratings with a ‘negative’ outlook, and ‘on watch’ in the past 12 months. Timely restructuring support from lenders will be crucial to credit quality.”
Sectors to watch closely in the least-resilient category include airlines, gems and jewellery, auto dealers, hotels, and real estate. Sectors exhibiting moderate resilience include thermal power generators, textiles, retail, and roads and construction. The financial sector, too, will bear the brunt with growth in bank credit seen nosediving to multi-decade lows of 0-1% and assets under management of non-banks contracting 1 to 3 per cent this fiscal.
The one-time restructuring permitted by RBI could help the asset quality of banks without which non-performing assets would have touched a two-decade high of 11.5 per cent by the end of this fiscal. For non-banks, loan delinquencies could dart up 50-250 basis points, depending on the segment of operation. While collection efficiency has improved from lows of April 2020, the self-employed, MSME and wholesale segments remain under pressure because of vulnerability in borrower cash flows.
Consequently, collection efficiency, liquidity levels and capital-raising ability – especially of non-banks – will determine near-term credit profiles in the financial sector.
While risks to credit quality remain tilted to the downside, a few high-frequency indicators point to early signs of demand revival. For instance, sale of tractors, two-wheelers and packaged consumer goods have been buoyant in the past couple of months, backed by above-average monsoon and good Kharif crop, although many of these indicators still remain below pre-pandemic levels.
“While recovery could be quicker in select high resilience sectors, we will have to wait for fiscal 2022 for a broader and sustained revival in economic activity,” CRISIL said.