Six sectors face higher risk from second pandemic wave
The continuing resurgence in Covid-19 cases and proliferation of localised restrictions could dampen the pace of recovery for the Indian corporate sector, cautioned ICRA Ltd.
However, the percentage of the rated portfolio that would be severely impacted by the second wave would be much lower than in 2020.
At the same time, the rating agency expects contact-intensive sectors like travel and hospitality, and retail to continue to face severe disruptions even in the second wave, and their recovery timelines to be further pushed back by these rising infections.
“In line with the rebound in economic growth, the credit ratio (ratio of upgrades to downgrades) had recorded an improvement after November 2020. With the fresh uncertainties wrought by the second wave of the pandemic, and the likelihood of additional support measures being limited, the credit ratio is now likely to stall,” Ramnath Krishnan, President Ratings, ICRA Ltd, said on 28 April 2021.
“The pace of recovery would undoubtedly be arrested by the recent surge in Covid-19 infections and associated localised restrictions. The extent of the impact would take a cue from the timelines with which this spike plateaus, and then starts receding.
“While the vaccination drive has commenced, the pace of the actual roll-out of the Covid-19 vaccines to the wider adult population, introduction of additional vaccines in the Indian market, their efficacy against different variants, and the duration for which the vaccines provide enhanced immunity will also impact sentiment and growth, going forward,” said Krishnan.
“Nevertheless, we estimate the impact of the second wave of the pandemic on many sectors to be lower than the first – an advantage from the less widespread and stringent lockdowns as of now (vis-à-vis the prolonged nationwide lockdown last year). Other supportive factors include lower global disruptions, absence of pricing pressures on commodity producers, increased digitisation and availability of additional funding lines,” he said.
“We foresee six sectors, namely, aviation; hotels, restaurants and tourism; media and entertainment-exhibitors; microfinance institutions; real estate-retail; and retail, to be at high risk from the second pandemic wave, much lower than in 2020,” added K. Ravichandran, Deputy Chief Ratings Officer, ICRA Ltd.
“Additionally, we expect the percentage of ICRA-rated portfolios that would be severely impacted by the second wave to be limited to 4%, much lower than the 17% seen last year. The entities in the riskier categories are likely to continue to face negative rating pressures compared to the average for the entire ICRA portfolio, as seen in the last fiscal.
“Moreover, the credit pressures for some entities in the high-risk sectors this time around could possibly be higher than the previous year, given the prolonged stress faced by these sectors with no visibility of return to normalcy, and the likelihood of limited fiscal or policy support in the absence of force majeure conditions like last time,” said Ravichandran.
Further, risk aversion among lenders could pose a challenge to credit growth, which the ratings agency projects at 7.3-8.3% and 7.0-9.0%, respectively, for banks and non-banks for FY2022. ICRA expects asset quality pressures for lenders to rise and profitability normalisation to stretch beyond FY2022. However, the banking system’s solvency profile is better than the pre-Covid levels, affording it a buffer to absorb shocks.
ICRA highlighted that the NBFCs were maintaining liquidity to cover more than three-month debt repayments since the beginning of the last fiscal. Considering the emerging uncertainties because of Covid-19, which could affect their near-term collections and fresh debt raise, ICRA expects the liquidity profile to be maintained with adequate buffer to give comfort to various stakeholders. Heightened investor caution on the asset quality of retail loan pools, especially for microfinance and unsecured SME loan pools, is likely to reduce securitisation volumes in the near term for the NBFCs.
ICRA cautioned that the localised restrictions have started to impede the sequential momentum in certain sectors, such as domestic airlines’ passenger traffic, electricity demand, vehicle registrations and the generation of GST e-way bills, even though the year-on-year growth will be high in April 2021 because of the low base related to the lockdown in April 2020.
ICRA expects the Indian GDP to grow by around 10-10.5% in FY2022. The key downside risks to its forecast are a continuation of this wave of infections and an extension of the restrictions imposed so far, relatively severe restrictions being imposed in additional states, and the existing vaccines not being effective enough against the new variants of the virus.
However, an earlier availability of vaccine imports, enabling a faster coverage of the vaccination drive, may offer a back-ended upside to the GDP growth in FY2022, after the disruption that may emerge in the near term. #economy #ratings #markets #investment #banking /fiinews.com
