CARE Ratings modified credit ratio (MCR) improves to three-year high in Q2FY2015

Sectors such as chemicals, textiles, pharmaceuticals, telecom, auto, electricity generation and construction have registered a favorable increase in their MCR

CARE Ratings measure of the movement in ratings, given by its modified credit ratio (MCR), which is the ratio of upgrades & reaffirmations to downgrades & reaffirmations shows a marked improvement in Q2FY15. CARE Ratings MCR at 1.25 for Q2 FY15 show a marked increase to a 3 year (or 12 quarter) high.

The latest reading of the MCR reflects the continued improvement in the credit quality of the rated entities. The ratio has been seen to be on the path of steady progress since the last 5 quarters.

With CARE Ratings covering a large and diverse set of entities and sectors, the movement in MCR is indicative as being reflective of the overall credit quality prevailing in the system.

The analysis of the industry-wise credit quality shows that sectors such as chemicals, textiles, pharmaceuticals, telecom, auto, electricity generation and construction have registered a favorable increase in their MCR (in H1FY2015). Hospitality, iron & steel and wholesale & retail trade segments have witnessed a moderation in their MCR.

An increase in MCR denotes an increase in upgrades vis-a-vis downgrades while a decrease in MCR shows the reverse. Therefore, an increase in the MCR implies stable and improving credit quality of the rated entities. An MCR closer to one indicates higher stability in ratings, with larger proportion of reaffirmations.

Given that CARE rates a large and diverse set of entities, the movement of MCR can be regarded as being indicative of the general business and economic environment of the country.

In Q2 FY15, 170 entities saw their ratings being upgraded, 61 entities had their ratings downgraded and 372 entities had their ratings being reaffirmed. There has been a rather sharp increase in the number of upgrades in Q2 FY15. A year on year comparison shows that the number of entities who have seen their ratings been upgraded has doubled. In Q2 FY14, 80 entities recorded a rating upgrade, 61 entities a rating downgrade and 326 entities saw their ratings being reaffirmed.

CARE Ratings highlights the strong correlation (0.82) between the MCR and GDP (FY12 to Q2FY15). The weakness in the MCR in the last 3 fiscals can be attributed to the weakness in the country's economy.

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