Rating Upgrades Rebound On Demand Recovery, Says Crisil

Rating upgrades outpaced downgrades in the last six months of the just concluded financial year as demand improved and the economy returned to growth after India eased the Covid-19 lockdown curbs.

Credit ratio—which measures the ratio of the number of upgrades to downgrades—rose to 1.33 during October 2020-March 2021 compared with a fall to 0.54 in the first half, according to Crisil Ratings. During the period, there were 294 upgrades and 221 downgrades.

The debt-weighted credit ratio, which equals the ratio of debt in the books of firms upgraded to debt in the books of firms downgraded, also improved to 1.26 during the second half of 2020-21 from 0.52 in the first six months, the rating agency said in a report.

This comes as demand recovery sustained on the back of a steady farm performance and rural demand, impetus to infrastructure development in the Union Budget 2021, and the rollout of Covid-19 vaccination. These factors, the report said, held promise for continued improvement in the credit quality of India Inc. even as the spectre of a second wave of Covid-19 infections looms large.

Debt Resilience Improves

Crisil’s assessment of 42 sectors with a total debt of Rs 26.9 lakh crore showed a marginal improvement as rated debt within low-resilient sectors fell 100 basis points sequentially to 2% in the second half of the fiscal ended March 2021. There, however, wasn’t much improvement in the high- and medium-resilient debt buckets.

Gems and jewellery, hotels and resorts, retail, automotive dealers, airport operators and airlines were some of the worst-hit sectors for which recovery seemed distant, while sectors such as construction, thermal power generators, oil and gas, cement and chemicals had largely recovered. Other sectors, including telecom, pharmaceuticals, hospitals, agro-chemicals, dairy, fast-moving consumer goods and commercial real estate, had fully recovered, the rating agency said.

Impact On Financial Services

Even as the rebound in credit quality aided the financial services sectors, banks and non-banks may see a rise in their delinquencies on higher stress coming from loans given to retail-led and micro, small and medium industries, while larger corporates remained resilient.

Bank credit showed a V-shaped recovery from a contraction to 0.8% in the first half of 2020-21 to 5-6% growth over the past six months, aided by disbursements under the emergency credit line guarantee scheme. In fiscal ending March 2022, Crisil forecast bank credit growth to touch 9-10%, while non-banks will also see revival in growth to 5-6% as access to funding normalises.

But the revival in credit growth also came with bad loan woes that are expected to rise from 7-8% as of December 2020 to 11-11.5% as of March 2021 to Rs 1.5-1.8 lakh crore.

This, as gross non-performing assets in the retail segment, MSME and real estate financing may rise. Compared to fiscal ended March 2020, the delinquencies for,

• Unsecured loans are expected to more than double to 7.5-8% of the total assets under management in the banking system in fiscal 2021.

• Vehicles loans may rise from 6% to 9-10% in fiscal 2021.

• MSME finance may rise from 3.4% to 7.5-8% during the period.

• Real estate financing may rise from 4.5% to 15.5-20% in fiscal 2021.

The rise in bad loans also came as the Supreme Court lifted the stay it granted on the classification of non-performing assets by banks. For 2021-22, Crisil estimates gross NPAs to remain in the range of 10.5-11%.

The rating agency further said that restructuring would remain close to 2-3% of the total loans in the banking system.