Credit quality of Indian corporate sector experiences rebound in FY22: ICRA

Geo-political tensions may limit further improvement in FY23

The credit quality of the Indian corporate sector experienced a rebound in FY2022, on the heels of two consecutive years of pressures caused by economic slowdown in FY20 and the COVID-19 pandemic in FY21, according to rating agency ICRA.

The instances of downgrades in ratings in FY22 (at 184 entities) reflected a downgrade rate of a mere six per cent. This was substantially lower than the recent high of 13 per cent seen in FY2020 and the past 10-year average of  nine per cent. In contrast, the upgrade rate of 19 per cent (561 entities), stood at a multi-year high vis-à-vis the past 10-year average of 11 per cent.

Rating agency said as businesses and policymakers adapted to the challenges, and as the economic repair-work progressed, the incremental downside credit risks ebbed in FY2022.

The sectors that witnessed a relatively high rating activity in the just-concluded fiscal include power, real estate, ferrous metals, textiles, roads and pharmaceuticals.  

A large majority of upgrades were driven by entity-specific factors rather than sectoral tailwinds. As an example, in the power sector, several upgrades were triggered by the alleviation of execution risks as the renewable energy projects concerned became operational. Also, in some instances, the demonstration of a consistent Plant Load Factor (PLF) track record which reduced the uncertainty around operations at the power unit led to upgrades.

Likewise, several upgrades in the real estate sector were triggered by fresh funds infusion by the sponsors and/ or a favourable change in the ownership. Upgrades were also triggered by factors such as favourable refinancing, and asset monetization supporting a material reduction in debt, it added.

Currently, ICRA has a ‘Positive’ outlook on the following sectors: metals, oil & gas (upstream), roads (toll), and textiles (cotton spinning). And the following sectors are on a ‘negative’ outlook: airlines, airport infrastructure, media (exhibitors), power (thermal), and power (distribution).

Most corporate sectors are on a path to recovery. Further, there exist additional opportunities in sectors like steel, agricultural produce, textiles, and electronics goods to scale up exports. The Production-Linked Incentive (PLI) Scheme too promises to enhance the supply chain resilience, support import substitution, and create other positive externalities.

At the same time, banks as well as Non-Banking Finance Companies (NBFCs) are currently comfortably capitalised while facing manageable asset quality pressures. In effect, with both the real sector and the financial sector in relatively good health, the year FY2023 could well have been a year of moving beyond the ‘rebound’ growth, but for the ongoing geo-political tensions.  

 Following the Russia-Ukraine conflict, the risk of supply chain disturbances and the commodity price turmoil have raised the spectre of inflation across the globe, it added.