Default rates at Indian firms may rise more on higher interest rate: Icra

More Indian companies are likely to default on their borrowings in the fiscal year that started in April compared with the previous year on higher interest costs and a deterioration in business conditions, according to rating agency ICRA.

The default rate for Indian companies rose to 3.4 per cent in the fiscal year ended March from 2.6 per cent in the previous year, ICRA, the subsidiary of global rating agency Moody's Investors Service, said in a report published on Monday.

"The default rate could go up in fiscal year 2019 on higher interest cost, deteriorating business conditions, likely difficulty in getting bank funding given the challenges in the banking system," said Jitin Makkar, head of credit policy at ICRA, in a webinar.

Besides huge stressed assets, banks are also likely to go slow on lending following the detection of more than $2 billion fraud at the country's second largest state lender, Punjab National Bank, which could eventually hit the economy that grew at 7.2 per cent in October-December but still below 8 per cent needed to hit full employment.

While the report showed that 646 companies were upgraded and 418 were downgraded, the trend did not mean that there was an improvement in the credit quality of the corporates given that the volume of debt downgraded at 3 trillion rupees ($46.08 billion) in the fiscal year ended March was sharply higher than 1.7 trillion rupees upgraded, ICRA said in the report.

Looking ahead, credit quality pressures will "take longer to dissipate" as hardening interest rates and banking sector woes will create hindrances for businesses, ICRA said.