Majority Of Firms That Availed Loan Moratorium Are Sub-Investment Grade, Says Crisil

The Reserve Bank of India’s moratorium on loan repayments largely benefited mid-sized sub-investment grade companies, according Crisil Ratings.

More than 2,300 non-financial companies availed the moratorium announced by the central bank on March 27 in the wake of the Covid-19 lockdown, the rating agency said in an Aug. 31 report. Around 75% of these had sub-investment grade credit ratings (BB+ or below) from Crisil, and were already facing a dent in their business performance due to the economic slowdown prior to the pandemic.

“The severely curtailed business activity that followed in the first quarter of this fiscal had cramped cash flows, so the moratorium came as a big relief,” the report said. It acted as a liquidity support and prevented a weakening of their credit profiles.

“Companies in sectors impacted the most by the pandemic have been the keenest to avail of the moratorium," Subodh Rai, senior director, Crisil Ratings, said in the report. "While every sector has been affected by the dislocations stemming from the pandemic, majority of those with lower resilience have availed of the moratorium. Few among the more-resilient ones have done so."

According to the report:

• The number of mid-sized companies with a turnover of Rs 300 crore to Rs 1,500 crore opting for the moratorium is three times of those with a turnover of more than Rs 1,500 crore.
• One in every four companies that availed the moratorium with a rating of BBB- or higher used the option primarily to build a liquidity cushion for exigencies in the near term.
• Around 20% companies that opted for the moratorium are in highly impacted sectors such as gems and jewellery, hotels, auto components, automobile dealers, power utilities, independent power producers, energy traders, packaging, and capital goods.
• 10% of companies under the moratorium are from pharmaceuticals, chemicals, fast-moving-consumer goods, secondary steel and agriculture, the sectors relatively less impacted by the pandemic.

“The moratorium has been crucial in averting sharp downward rating actions in the face of shrinking turnover and declining profitability," Rahul Guha, director, Crisil Ratings, said. "It helped companies manage the sudden stretch in working capital cycles and cash flows amid the bleak business environment."

The demand outlook in most sectors will remain muted and companies in the low-resilience sectors will remain stressed over the next two to three quarters, according to the report.

The debt restructuring scheme announced by the RBI in early August can further support the credit profiles of mid-sized companies and help them manage their cash flows over the near term, it said.