Amidst the current economic turbulence, two rating agencies highlighted the weakening of the credit profile of a large number of entities in the first half of the fiscal year.
Rating agency Crisil said on Wednesday that its credit ratio (upgrades to downgrades) for the first half of the current fiscal year was the lowest in a decade at 0.54 with 296 downgrades and 161 upgrades.
“Corporate credit profiles remain vulnerable even as demand claws back amidst a raging pandemic,” it said, adding that the credit ratio was cushioned to some extent by regulatory support.
“While the rate of upgrades plunged as expected, the rate of downgrades did not surge as feared,” it noted. The outlook for the second-half of the fiscal remains negative and will depend on policy and regulatory measures, alongside demand recovery, it said.
Rating agency ICRA said there was a sharp increase in the negative rating actions it took in April to September this fiscal.
“In the first half of 2020-21, ICRA took 582 negative rating actions, which on an annualised basis accounted for 32 per cent of its rated portfolio, compared with the proportion of 23 per cent in 2019-20,” it said.
Slow demand
In the first half of the fiscal, the top five sectors — in terms of the count and the proportion of entities in the sector — that faced a negative rating action included textiles, real estate, hospitality, auto ancillaries and construction, it added.
“All these sectors (barring hospitality) were already facing a demand slowdown prior to the onset of Covid-19 and the pandemic-induced disruption further amplified the adverse effects,” it further noted. ICRA noted that there were lesser instances of defaults. Only 11 defaults were observed in ICRA’s rated universe in the first half of the fiscal as against 83 defaults a year ago.
Defaults to remain low
It attributed this to many corporates taking the moratorium and said it expects defaults to remain low in the second half of the fiscal due to the loan restructuring package. According to Crisil, sectors to watch closely in the least-resilient category include airlines, gems and jewellery, auto dealers, hotels, and real estate.
“Sectors exhibiting moderate resilience include thermal power generators, textiles, retail, and roads and construction,” it added, while cautioning that the financial sector, too, will bear the brunt with growth in bank credit seen nose-diving to multi-decade lows of 0 per cent to 1 per cent.
Gurpreet Chhatwal, President, Crisil Ratings said, “We expect credit quality pressure on India Inc to persist in the second half of this fiscal. There has been a near-doubling of ratings with a ‘negative’ outlook, and ‘on watch’ in the past 12 months.”
While the moratorium has provided near-term relief, demand recovery for moderate and least-resilient sectors will be protracted, he said, adding that timely restructuring support from lenders will be crucial to credit quality.