H1 credit ratio improves massively, trend may sustain: Crisil

The credit ratio of corporates, which is the ratio of upgrades to downgrades, has improved to 1.88 times during the first half, helped by better financial metrics, against 1.22 times a year ago, says a report.

The debt-weighted credit ratio, which is the quantum of debt outstanding on the books of the companies upgraded to downgraded, has surged to 3.19 times during the period, versus 0.88 times a year, says a report by rating agency Crisil.

A reading above 1 indicates upgrades outnumbering downgrades.

On a rolling 12 months average basis, for the first time in the past five years, both these ratios are above 1.

The credit ratio stood at 1.59 times and the debt-weighted credit ratio at 1.94 times, indicating that the trend of recovery in credit quality has sustained for a year now, Crisil Rating chief analytical officer Pawan Agrawal told reporters on a concall today.

"The improvement has come about primarily because of better financial indicators as corporates kept away from capex given the output gap-or substantial headroom in capacity utilisation-in many sectors," Agrawal said, adding the upward trend is expected to continue till demand firms up and lower interest costs will provide further support.

He said high level of stressed assets in the banking sector is continuing to choke the economy. Bad loans stood at around Rs 11.5 trillion, or nearly 14 per cent of total advances as of March 2017.

"Credit quality of India Inc is a tale of two distinct loan books. The good one is where we have been seeing improvements over the past year, and which should sustain.

"The bad one is where there are sizeable stressed assets. The only salutary part here is that the process of resolution and asset sales has been initiated," its senior director Somasekhar Vemuri said.

Barring the stressed assets, the rating agency expects the corporate credit quality to continue recovering, driven by further improvement in balance sheets.

Lower interest rates, stable working capital cycles, firm commodity prices and improving domestic consumption demand will also help, Vemuri added.

However, the credit ratio and the debt-weighted credit ratio would moderate from here and will track GDP growth. Small and mid-sized firms could also see cash flow pressures as they adjust to the new GST regime.

Going forward, progress on resolution of stressed assets will remain the key monitorable, he said.