Economic slowdown has begun to dent the credit profile of India Inc. There has been a deterioration in the credit quality of entities rated in the first quarter of the current financial year, showing effect of the prevailing slowdown in the Indian economy, according to rating agency CARE Ratings.
The credit rating downgrades have been largely on account of liquidity pressure leading to, at times, delays in debt servicing, high debt levels, weakening profit margins, decline in scale of operations.
The credit quality as measured by CARE Ratings ‘modified credit ratio’ (MCR), for Q1 2019-20 declined to a six year low of 0.8 (1.02 was the ratio in Q1 2018-19). It was at the same level as of Q1 2012-13 when the domestic economy was faced with a slowdown.
The Modified Credit Ratio (MCR) is defined as the ratio of "upgrades and reaffirmations" to "downgrades and reaffirmations". An MCR closer to one indicates higher stability in the ratings, with a larger proportion of reaffirmations.
An increase in the MCR implies an improving credit quality of the rated entities while a decline in the same signals a deterioration in credit quality of the rated entities.
The moderation in credit quality, indicative of the higher number of credit rating downgrades, has been across categories and sectors. It was more pronounced in the case of small enterprises (total revenues less than Rs 100 crores) as well as for entities who carried ‘below investment grade’ ratings (credit rating below “BBB”).
The stability in credit quality of the large and medium enterprises (LME) and the entities that have ‘investment grade’ rating have been sustaining, limiting the moderation in credit quality at the aggregate level.
The SME segment accounted for 45 per cent of the ratings reviewed by CARE Ratings in Q1 2019-20.
At the same time, the reaffirmation and upgrade of ratings of entities has been influenced by the entities with favourable financial position/ profitability, increase in scale of operations, comfortable debt servicing parameters, liquidity position and capital structure. Company and industry specific factors too have influenced the rating changes.