Corporate default rate at decade-high of 4.5%

In FY12, the default rate stood at 3.5%, while in FY11, it was 0.3%

India Ratings & Research on Tuesday said last financial year, the annual corporate default rate had touched a decade-high of 4.5 per cent due to the adverse impact of declining demand, the rupee’s slide and the tight liquidity conditions.

In 2011-12, the default rate stood at 3.5 per cent, while in 2010-11, it was 0.3 per cent. The average annual default rate across India Ratings’ corporate finance ratings between 2004-05 and 2012-13 was 2.6 per cent.

While benchmark interest rates — the repo rate and 10-year government security rates — fell in FY13, the economy faced a liquidity crunch. The credit quality of issuers deteriorated due to the slow pace of both domestic and global demand, the high cost of borrowings and the leveraging of corporate balance sheets.

Kishore Gandhi, chief credit officer at India Ratings, said, “The challenging economic environment will continue in FY14. A recovery, driven by ease in liquidity conditions and stability in the forex market, along with consumption and demand revival on the back of a favourable monsoon, would bolster corporate performance in the second half of FY14.”

Devendra Kumar Pant, chief economist at India Ratings, said, “After the initial setback, issuers have started managing their finances better by controlling their inventory positions and operating according to demand conditions. This reduced the pace of downgrades in FY13.”