Debt Downgrades In April-September Period At The Highest Since FY16
A stockbroker at a brokerage in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Debt Downgrades In April-September Period At The Highest Since FY16

High debt leverages among Indian corporates coupled with an economic slowdown, governance and liquidity issues have led to a larger quantum of debt rating downgrades in the first half of this year compared to the past.

Debt worth Rs 1.38 lakh crore was downgraded in the first half of the current financial year, according to rating agency Crisil’s semi-annual credit quality report.

The quantum of debt downgraded jumped sharply compared to Rs 39,000 crore in the first half of FY19. It was also the highest value of downgrades recorded in any half year since FY16, when the Reserve Bank of India initiated an asset quality review of Indian lenders.

Demand-side challenges were the most common reason for downgrades, said Crisil. Profitability pressure and working capital issues are other major reasons for the increase in downgrades, the rating agency added.

Crisil’s debt-weighted credit ratio, which measures the quantum of debt downgraded to debt upgraded, dropped to 0.25x in the first half of FY20, compared to 1.65x for FY19. A ratio of less than 1 shows that more debt was downgraded than upgraded.

 Debt Downgrades In April-September Period At The Highest Since FY16

The credit ratio, which looks at the number of entities downgraded versus those upgraded, moderated to 1.21x in the first half of FY20. A ratio of more than 1 shows that more entities were upgraded than downgraded. However, the ratio fell to its lowest in the last six half-yearly assessments, Crisil said.

Across rating categories, entities with higher leverage saw more downgrades as pressure from the demand slump intensified. Declining profitability and stretch in working capital cycles also were reasons for the downgrades. On the other hand, those with lower leverage withstood the demand-side challenges better.
Somasekhar Vemuri, Senior Director, Crisil Ratings

The fall in credit quality was seen across investment, export, and domestic consumption-linked sectors.

Among investment-linked sectors, construction and allied sectors accounted for over 30 percent of downgrades because of delays in project execution and stretched liquidity. Consumption-linked sectors accounted for 15 percent of downgrades. Firms within export-oriented sectors saw downgrades because of constrained access to funding, lower export competitiveness and weak demand, the rating said.

For financial services firms, the funding squeeze faced by non-banks and housing finance companies continues to pose a challenge, particularly for to wholesale-focused lenders, Crisil said.

“We remain cautious about the credit outlook for the second half because demand pressures persist. Going forward, how well demand recovers after a good monsoon, the sharp cut in corporation tax, faster and automated release of Goods and Services Tax refunds, and higher export incentives will be the key monitorable,” said Gurpreet Chhatwal, president, Crisil Ratings.

ICRA Ratings Sees A Similar Trend

ICRA Ratings and Research too downgraded a larger quantum of debt in the first half of the current fiscal compared to last year.

The rating agency downgraded Rs 5.2 lakh crore of debt in the first half of FY20, compared to Rs 3.2 lakh crore for the whole of FY20.

ICRA downgraded the credit ratings of 266 entities in the first half of the ongoing fiscal, while there were 170 credit rating upgrades published by the rating agency during the same period.

The credit quality pressures on India Inc. have been persisting for several years now but the past 12 months have been particularly troublesome. While banking sector asset quality concerns have likely bottomed out, the non-banking sector concerns relating to asset quality of wholesale book, liquidity and asset-liability mismatches continue to brew. This, coupled with slowing economic growth because of sluggish consumption and investment demand, implies that credit quality pressures will take a while to dissipate.
Jitin Makkar, head of credit policy, ICRA Ratings

However, some of the stronger corporate and financial sector entities have been able to attract large volumes of capital in the current environment which has “widened the schism between the exceptionally strong and the moderately strong entities,” Makkar added.

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