ICRA downgraded the ratings of 483 entities in FY2021
While uncertainties relating to the sustenance of the recovery remain, stoked further by the second wave of Covid infections, ICRA Ltd’s base case assumptions suggest that the overall credit quality of India Inc is on the mend.
“The rising trend in upgrades seen since Q3 FY2021 and the smaller count of sectors carrying a negative outlook reflect this view,” ICRA Deputy Chief Rating Officer K. Ravichandran said on 1 April 2021.
ICRA downgraded the ratings of 483 entities in FY2021 reflecting a downgrade rate1 of 14%, coming on the heels of an even higher downgrade rate of 16% seen in FY2020. The proportion was much higher than the preceding five-year average of 8%, reflecting the elevated credit pressures seen in the past two years.
In comparison, the ratings of 293 entities were upgraded by ICRA in FY2021. These accounted for 9% of the portfolio entities, a proportion similar to that seen in FY2020. This, however, stood lower than the preceding five-year average of 11%.
The slowdown in consumption and investment demand, besides increased vulnerabilities of the wholesale lending focused non-bank finance companies had significantly weighed on the credit profiles of India Inc in FY2020.
The credit concerns had got amplified in FY2021 in the wake of the Covid-19-induced business disruption. But a broad resumption in economic activity, post the lifting of the lockdown, supported in ample measure by the fiscal and monetary policy interventions, has allowed businesses to recover, even as the recovery remains uneven thus far.
“The credit quality of India Inc has experienced two consecutive years of elevated pressures, but recent trends suggest that the trough is behind us,” said ICRA.
While on a full-year basis, both FY2020 and FY2021 marked a sharp rise in the proportion of entities downgraded in ICRA’s portfolio (vis-à-vis the historical averages), the rating action trends since November 2020 suggest that incremental downgrade pressures have ebbed.
At the same time, the proportion of rating upgrades has been on the rise over the past two quarters, it pointed out.
Select sectors that experienced a healthy Credit Ratio in FY2021 include Power, Pharmaceuticals, Healthcare, and Chemicals.
The sectors that experienced a high downgrade rate and a Credit Ratio in FY2021 included Hospitality, Textiles, Real Estate, Construction, and Automobile Dealerships.
Downgrades in these sectors were caused by tepid demand impulses as well as supply-side dislocations because of the pandemic.
Overall, the proportion of downgrades across rating categories exhibited ordinality, implying that the progressively lower-rated entities experienced a higher proportion of downgrades in view of their less resilient credit profiles.
ICRA, for now, continues to maintain a negative outlook on the following sectors: Aviation, Hospitality, Power (Thermal Power Producers and Distribution Entities), Real Estate (Residential and Retail), Retail, Shipping (tanker segment), Telecom, and Non-Banking Finance Companies—because of a mix of cyclical and structural factors.
This is a much smaller set of sectors compared with the wider set that was on a Negative outlook at the beginning of the year, said the consultancy.
Looking ahead, Ravichandran said, “The credit quality trends in the near to medium term would remain sensitive to the span of Covid infections and the attendant demand and supply-side disorders that it may engender. The movement in commodity prices is also a variable which would have contrasting credit effects on the producers and the consumers.
“The likelihood of a rise in interest rates is substantial in view of the large Central and expected state government borrowing plans for FY2022. The trajectory of the commodity prices and the borrowing costs would in turn have a bearing on the capital expenditure budgets and the viability of infrastructure investments ongoing and in the pipeline.
“Nevertheless, the trade cycle, if not the domestic capex cycle, may see an upturn — supported by the large dose of fiscal stimulus planned in the United States. As regards the financial services sector, sustained improvement in asset quality and collection efficiencies will be the key to improvement in credit profile, even as the funding environment has eased significantly.”
While the overall credit growth in the economy currently remains in mid-single digits, the credit flows have generally stabilised and this implies that the funding needs of the real sector would likely be adequately met.
This would provide the enabling conditions for GDP growth to print in the range of 10-11% in FY2022.
“Beneath the broadly supportive financial conditions, the schism between the stronger and the weaker entities may continue to prevail or even widen, with capital tending to gravitate towards the former set of entities, a dynamic that was on display even in FY2021,” said Jitin Makkar, Head-Credit Policy, ICRA.
“Overall, while the credit quality challenges for India Inc. are expected to abate in the near term, compared with the past two years, the seeds of a reassuring and a broad-based recovery are yet to take root,” said Makkar. #economy #investment #trade #banking /fiinews.com
