Credit quality of India Inc has experienced rapid changes
The outlook on India’s infrastructure-related sectors viz., Roads and Ports is Stable. Growth in toll collections and higher cargo growth, respectively, will drive these sectors’ profit and revenue growth, ICRA Review of the industry said on 27 Jan 2021.
The outlook on the securitisation transaction ratings is also Stable as the collection efficiency has improved in the ICRA-rated pools which mitigates the downgrade pressures that existed when credit concerns were at their peak in Q1 FY2021.
The outlook on sectors viz., Ferrous/Non Ferrous Metals and Textiles has been revised from Negative to Stable following the uptrend in prices and expectations of healthy revenue and profit over the medium term. At the same time, the outlook on Cement, Passenger Vehicles and Auto Ancillaries has been revised from Negative to Stable following an improvement in the operating environment.
ICRA Ltd Deputy Chief Rating Officer K Ravichandran said, “At the portfolio level, as at the end of December 2020, around 13% of the entities rated were on a Negative outlook compared with around 8% at the same point last year. ICRA expects the credit quality pressures to remain elevated in general over the near to medium term; however, the intensity is likely to remain quite varied across sectors.”
But the credit quality of India Inc has experienced rapid changes since the onset of the Covid-19 pandemic and the imposition of the nationwide lockdown in March 2020. Business health has been bruised in general and some entities in select sectors have been badly hurt, even though the effects have not been apocalyptic, and the worst-case scenarios have not played out.
The findings are as per ICRA Research’s latest review of its credit outlook – it mentions how the portfolio of ICRA-assigned ratings behaved amid the credit pressures; the impact of the pandemic on defaults and the direction of the credit quality trajectory over the near to medium term.
Ravichandran elaborated, “Negative rating actions by ICRA increased between March-December 2020 and about 13% of the portfolio experienced a rating downgrade as against the previous 5-year average of 9%. In addition, another 9% of the rated entities witnessed a change in outlook – from Stable to Negative or from Positive to Stable. Without the various fiscal and monetary interventions which provided a liquidity relief to the borrowers, the negative rating actions could have been higher.
“Among the sectors – Textiles, Real Estate and Construction were the top three in terms of the count of downgrades. Besides, Aviation and Hospitality sectors too witnessed a number of negative rating actions. As for upgrades, only 3% of the rated entities were upgraded in the past 10-month period, as compared with the previous five-year average of 9%. These upgrades were driven entirely by entity-specific factors and were far from being a harbinger of any sector-related tailwinds.”
ICRA notes that instances of defaults have been much lower in the past 10 months, supported in good measure by the moratorium on loan payments available to the borrowers between March and August 2020 and other liquidity support lines and loan restructuring reliefs availed. There were only 30 defaults across the rating spectrum compared with 81 in the corresponding previous period. It seems incongruent that in arguably the most stressful period for businesses in recent history, the instances of defaults remained low. But this was largely an outcome of the relaxation provided by the regulators to the credit rating agencies (CRAs) in terms of default recognition.
About 26% of entities in ICRA’s portfolio availed of the moratorium relief from the lending institutions and investors. It was observed that lower the rating of the entities, the higher was the share of entities that opted for the relief.
As the moratorium period ended in August 2020, it was expected that the entities most affected by the pandemic-induced business disruption would seek to get their loans restructured under the resolution framework specified by the Reserve Bank of India (RBI) for Covid-19-related stress. ICRA had initially expected 6-8% of the borrowers at the system-level to get their loans restructured.
However, as the timeline for invocation of the Resolution Plans (RPs) by the lending institutions ended on December 31, 2020, it was observed that only a handful of entities in ICRA’s portfolio had applied for loan restructuring and for only 19 entities among them was the RP invoked. Even at the system-level, ICRA understands that the instances of loan restructuring have been much lower than initially envisaged.
A key contributing factor to the tiny proportion of loan restructuring instances has been the alternative liquidity relief available to the eligible borrowers in the form of the Guaranteed Emergency Credit Line (GECL) as a part of the Emergency Credit Line Guarantee Scheme (ECLGS). Around 12% of entities in ICRA’s portfolio have availed of or are in the process of availing these facilities from the lending institutions. Entities in the Textiles, Engineering, Auto Ancillaries, Hospitality and Construction sectors have been the top five applicants/ beneficiaries.
ICRA expects the default rates to remain low in the near-term, as the entities avail of these lines and benefit from the improvement being seen in the operating environment post the trough of Q1 FY2021, buttressed further by the prevailing low interest rate environment.
As for the trajectory of credit quality in the near-to-medium term, the credit outlook on several sectors is assessed to remain as Negative. These include Aviation, Hospitality, Residential Real Estate, Retail, and Commercial Vehicles. For these sectors, the negative effects of the pandemic are likely to persist over the near to medium term.
The outlook on the Power (Thermal generation & Distribution) and the Telecom sectors too remains Negative in view of the structural challenges these sectors face currently.
In the financial sector, while banks are on a Stable outlook, non-banks (NBFCs, including Housing Finance Companies and Microfinance Institutions) are on a Negative outlook. The latter will continue to face asset quality pressures through FY2022, said ICRA. #economy #financing #banking #investment #markets #consumers #demand /fiinews.com
