Corporate Debt Downgrades More Than Doubled In FY20, Says ICRA
ICRA cut credit ratings of 584 corporates with an aggregate debt of Rs 7 lakh crore in FY20.
The credit quality of Indian companies deteriorated in 2019-20 as the value of debt downgraded more than doubled, according to ICRA Ratings Ltd. The disruption from the Covid-19 pandemic will only make things worse.
ICRA cut credit ratings of 584 corporates with an aggregate debt of Rs 7 lakh crore in FY20, according to its report. That compares with 390 downgrades involving an aggregate borrowing of Rs 3.2 lakh crore in the previous fiscal.
- Ratings of about 282 firms were upgraded in FY20, down from 513 in FY19.
- About 58 percent of entities downgraded were financial firms, followed by companies from power, ferrous metals and construction sectors.
- The overall default rate, however, softened to 2.3 percent from the past five-
year average of 3.0 percent.
The value of debt downgraded rose as India’s growth was slowing even before the Covid-19 pandemic. Now, most of the economic activity has come to a standstill, adding to concerns.
“The current Covid-19 pandemic-triggered crisis has led to a widespread deterioration in the credit quality of India Inc.,” Jitin Makkar, vice-president and head of credit policy at ICRA Ratings, said. “The credit challenges are overwhelming and would impact the credit profiles of a large number of entities across sectors in an unprecedented manner.”
Sectoral Risks
ICRA Ratings said the credit profile of a large number of sectors and companies has become vulnerable.
High-risk sectors: These face business disruption and a prolonged recovery. According to the rating agency, these include aviation, ports, retail, gems and jewellery, microfinance institutions, shipping, textiles, non-ferrous metals and tourism, hotels and restaurants, among others.
Medium-risk sectors: These may not face a severe business disruption in the long-term but will have to endure an immediate impact. These include auto ancillaries, consumer durables, housing finance companies, plastics, logistics, power, private and public sector banks, residential real estate, construction, healthcare and pharmaceuticals, among others.
Low risk sectors: According to ICRA, these include education, telecom, roads, dairy, agricultural product, food products, medical devices and sugar, among others.
Over the last financial year, corporates in the power and healthcare sector witnessed an improvement in their credit profiles whereas ports, retailers, tea and coffee manufacturers, public financial institutions witnessed the largest deterioration in credit profiles.
Makkar said credit ratings are being assessed based on the stability on the asset and liabilities. Entities facing challenges on both are categorised as high-risk with a low probability of a ratings upgrade in the near-term, he said.
For non-banking finance companies, the situation is dire since smaller players face a challenge on both assets and liabilities.
“Raising funds is difficult and collection efficiencies are down,” said Karthik Srinivasan, group head of financial sector ratings, at ICRA. “Since most NBFCs have extended the moratorium to borrowers, we will be awaiting clarity on how the economy recovers and whether borrowers come back and pay their installments from June onward.”
Ratings Assessment In Time Of Covid-19
ICRA has had to reassess its ratings methodology as companies across sectors will be impacted differently by the nationwide lockdown. It’s expected to be extended in some form after May 3. But it’s unlikely that the entire economy will open up immediately as the central and state governments plan to lift restrictions in a gradual manner over the next month.
“We are approaching ratings first by sector level risk assessment and then an entity-level mapping,” Makkar said. “In case we judge that some of these sectors face credit issues going forward, the rating will undergo a change based on a revised set of assumptions.”
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ICRA said it will monitor the credit profile of companies based on the impact on revenues, fixed costs, operating and non-operating costs, capital expenditure and investments, and liability profile.
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“Since many entities have received moratorium from banks or are in the process of receiving it, the liquidity buffers for them would be healthy. But for entities with a high share of market borrowings, there may challenges in term getting a deferment on maturities or restructuring,” Makkar said.