Large, medium enterprises see 7-year fall in credit quality in April-Dec

Credit quality of the large and medium enterprises (LMEs) segment weakened to a seven-year low in the current finacial year (April-December 2019).

The asset quality deteriorated for small enterprises (SMEs) as well but with lesser intensity, according to CARE Ratings.

The modified credit ratio (MCR) for the LME segment declined to 0.92 in the nine months of 2019-20. LMEs accounted for 70 per cent of the entities whose financials were reviewed during the period. Thus, they have a larger share in the deterioration of overall credit quality. 

MCR is defined as the ratio of upgrades and reaffirmations to downgrades and reaffirmations.

While the SME segment, too, saw a decline in its financial position, the overall credit quality of the segment was seen as stable with the MCR ruling over one in the April-December 2019 period.

The MCR in April-December 2019 declined to 1.07 from 1.12 in April-December 2018.

Downgrades in manufacturing or services and infrastructure entities are mainly due to deterioration in capital structure, weakening profit margins, decline in scale of operations, delays in debt servicing and weakening debt coverage indicators, CARE said.

Credit rating downgrades in financial sector entities in 2019-20 have been largely on account of continued liquidity pressure, leading to delays in deleveraging efforts of these entities.

The reaffirmation and upgrade of ratings have been influenced by the favourable financial position of entities. 

These are with respect to profitability, increase in scale of operations, comfortable debt servicing parameters, liquidity position and capital structure.

Of the 29 key sectors, the credit quality measured by the MCR in the nine months of 2019-20 was above one for entities belonging to 17 sectors, indicating improvement in or higher stability rating. 

The credit quality of 12 key sectors was stressed with their MCR being below one.