FY13 corp defaults jump to decadal high of 4.5%: India Ratings

Says credit quality of issuers deteriorated due to the slow pace of both domestic as well as global demand growth, high cost of borrowing, leveraging of corporate balance sheet

India Ratings today said annual defaults by India Inc reached a decadal high of 4.5% last fiscal, up from 3.5% in the year-ago period, with as many as 32 issuers defaulting on their credit obligations.

"Credit quality of issuers deteriorated due to the slow pace of both domestic as well as global demand growth, high cost of borrowing and leveraging of corporate balance sheet," India Ratings said in a report released here.

The note said the default rate was 3.5% and 32 issuers defaulted in FY13 to push up the rate of default to a decadal high.

The absolute amount which got defaulted is not known and the ratings agency said the default rates are computed on an issuer-basis and not on the amount.

GDP growth had plummeted to a decadal low of 5% during the last fiscal, while the same stood at 6.7% in the earlier fiscal.

The defaults increased even as RBI cut the repo rate, increased its average fund injection to Rs 559.68 billion in FY13 from Rs 519.55 billion in the previous fiscal and cut the cash reserve ratio by 0.75% during the fiscal, it said, acknowledging that the liquidity remained tight in FY13.

The report said the average annual default between FY05 and FY13 was 2.6%.

Overall, the number of downgrades continued to be higher for the second straight fiscal in FY13, even though the ratio of upgrades to downgrades improved to 0.7:1 from 0.5:1,the report said.

In FY13, 9.7% of the rated corporate entities were downgraded as against the earlier fiscal's 12.3%, while 6.6% were upgraded, up from 6% in FY12.

Stating factors like policy logjam affected economic growth, it said, there were challenges both on the internal (fiscal deficit) as well as external front (current account deficit) during the reporting period.

For FY14, economic environment will continue to remain challenging, it said, adding the industrial activity is likely to remain lacklustre even though the good monsoons will prop up agricultural growth.

There are other green-shoots as well like a pick-up in the US economy and the Eurozone coming out of recession, while the Japanese and Chinese economies are also doing well, the report concluded.