Corporate credit quality to take longer to improve: Crisil

Domestic ratings agency Crisil today said credit quality improvement will continue to be gradual in FY 2016 as well, but underlined that large companies are a cause of worry.
The large companies need to deleverage balance-sheets stretched by loans for an improvement in the overall NPA situation of banks, which is around 12 per cent of the system now, it added.
"We expect that the credit ratios will improve gradually in FY 2016," agency's chief analytical officer Pawan Agrawal told reporters on a conference call here.
He said the credit ratio, which is the ratio of upgrades to downgrades, for the 13,000 companies it rates, had a slow recovery in FY 2015, helped largely by the mid-sized enterprises with Rs 100-500 crore revenues. These 13,000 companies represent around 40 per cent of the bank credit to corporates.

There were 816 upgrades in the final six months of the past fiscal compared to 466 downgrades, resulting in an overall credit ratio of 1.75 for the period.
However, the large corporates having revenues of over Rs 500 crore continue to show tepidness in their credit quality, Agarwal said.

Going by the quantum of credit, companies having an exposure of Rs 2 trillion got downgraded in FY15 as against Rs 1.4 trillion of credit which got upgraded. But for large companies, the credit ratio was only 0.45 in H2 of FY15 versus 2.26 for mid-sized firms 1.55 for the small-sized firms.

"The heavy burden of debt will continue to constrain the ability of large firms to improve their credit profiles," he said in the outlook for FY16 and specifically pointed out that a chunk of this debt has been taken for stuck projects.
Agrawal said factors like movement in commodity prices, domestic investment climate which depends on the movement on the reforms front and the domestic consumption will be the key factors which will have a bearing on the credit profiles of the companies.
Other factors like the movement in the lending rates will also be a key monitorable, he said, stressing that banks need to pass on the RBI's rate cuts to borrowers.

On the high non-performing assets situation, Crisil said an improvement is possible only if the companies are able to deleverage their balance sheets stretched by high loans.
In FY 2015, two-thirds of the rating upgrades were driven by business-related factors, while 28 per cent were driven by liquidity improvements. However, for the rating downgrades, 60 percent were due to liquidity problems.
From the sectoral basis, mid-sized companies from the textile, trading companies, agri and auto parts scetors showed improvement, while infrastructure and steel companies (which are among the highest borrowers) saw the most downgrades, Agrawal said.