Icra to review rating methodology, factor in 3-month Covid-19 disruption

The rater will now redraw its projections assuming that a business-as-usual operating environment may not return soon

Rating agency ICRA is revisiting its rating methodology to reflect coronavirus disease (Covid-19)-related dislocations, as it sees some critical sectors sliding into high-risk category after the nationwide lockdown ends.
 

The agency will now redraw its projections, assuming that a “business as usual” situation might not return soon.
 

“Because of the Covid-19 crisis, the credit profile of a large number of sectors and entities has become vulnerable,” the rating agency said in a statement.
 

The high-risk category would include critical sectors such as aviation, ports, seafood, gems & jewellery, microfinance institutions, shipping, textiles, tourism, hotels and restaurants, among others.
 

These are sectors that face severe disruption over the immediate term. Further, recovery after the crisis would also likely be more prolonged, heightening credit risks, ICRA said.

“Therefore, it is imperative to communicate with lenders, investors and other market participants about how ICRA is thinking about the credit developments in general and more so in uncertain times like these,” said Jitin Makkar, head of credit policy at ICRA, during a webinar on Tuesday.
 

Accordingly, ICRA’s projections would be drawn in a manner that assumes a severe disruption for at least three months, followed by a slow recovery.
 

For firms whose borrowings are a mix of loans from banks and from market instruments such as bonds, ICRA’s immediate focus will be on liquidity assessment, besides determination of financial flexibility and availability of other forms of external support such as from parent or group.

For firms that are mainly dependent on bank loans, the agency would follow the moratorium permitted on debt servicing obligations.
 

“The immediate near-term pressure on the liquidity of borrowers is likely to have been alleviated somewhat. This also implies that the possibility of occurrence of default on bank borrowings at least until May 31 is less of a concern,” ICRA said.

However, that doesn’t imply that credit pressures on borrowers with only bank borrowings have eased following the relief on debt servicing.

According to the rating agency, credit quality of India Inc faced headwinds in financial year 2019-20 (FY20) because of an economic slowdown, coupled with sluggish consumption and investment demand.

Ratings of 584 entities were downgraded in FY20, reflecting a downgrade rate of 16 per cent, significantly higher than the past five-year average of 9 per cent, it said. There were 282 upgrades, reflecting an upgrade rate of 8 per cent, lower than the previous five-year average of 10 per cent.

The volume of debt downgraded in FY20, too, was high at Rs 7 trillion and was more than double the previous fiscal’s figure of Rs 3 trillion.
 

“This was mainly because of the downgrade in ratings of several financial sector entities, including housing finance companies, non-banking finance companies and private sector banks. This apart, several debt-heavy non-financial sector entities experienced a downgrade, mostly in the power sector, ferrous metals and construction sectors,” ICRA said.