Lower-rated borrowers may find it difficult to refinance outstanding loans if tight financial conditions persist and policymakers do not take steps to keep liquidity flowing through financing channels. That’s the view from India Ratings.
The rating agency, in a report today, cautioned that between Rs 3 lakh crore and Rs 4 lakh crore in credit may face refinancing risk if current challenges to the financing environment persist. These challenges include stressed bank balance sheets and elevated rates in the bond markets.
About Rs 7.6 lakh crore in debt currently lies with non-public sector entities rated BBB or below, according to the report. Within this, about Rs 3-4 lakh crore in debt falls in the ‘vulnerable’ category. “These corporates would remain reliant on banks for refinancing, given that in most of these cases, free cash flows would be inadequate for debt repayments,” India Ratings said. It added that tight market conditions mean that there is increasing risk aversion towards lower-rated borrowers.
The rising risk aversion in the market indicates that sourcing credit for issuers who are rated below ‘A’ category is increasingly becoming difficult.India Ratings
Sectors that can face elevated refinancing risk include power, telecom, infrastructure and metals and mining, the rating agency said.
India Ratings also said the refinancing risk was skewed towards smaller businesses, which are not in a position to withstand financing pressures. Rising input costs, limited ability to pass on cost inflation, the goods and services tax-led elevated working capital needs and an adverse external environment have increased the need of financing.
Ind-Ra expects the liquidity profile of corporates to remain skewed; while entities with strong financial profiles are likely to be well equipped (in terms of generating cash flows as well as ease of access), weak entities could be stressed.
Among the key reasons for the prevailing financial conditions is the health of public sector banks, which is constraining credit flow even though systemic liquidity conditions are comfortable.
India Ratings said the weak financial position of public sector banks would limit their ability to grow their balance sheets over the near to medium term. Credit costs for public sector banks in the last financial year were around 4.5 percent of average advances, it said.
While non-bank financial companies will be able to partly fill the gap left by public sector banks, challenges could emerge there as well. This is because 50-60 percent of NBFC funding comes from banks in the case of AA-rated NBFCs. Also, some banks could soon hit the sectoral limits for exposure to NBFCs.
The extent to which NBFCs will capitalise on these opportunities and fill the credit gap will also be subject to scheduled commercial banks’ appetite for the overall credit and for the NBFC sector.India Ratings
The rating agency said ‘easy and durable system liquidity’ had become a necessity to tide over the tight short-term financial conditions. It said recapitalisation and early infusion of liquidity could address credit tightening to a certain extent.