With effect of sharp economic contraction across sectors in India, the credit ratio (rating upgrades to downgrades) touched a decadal low of 0.54 per cent in the first of current fiscal ended September 2020 (H1FY21). There were 296 downgrades and 161 upgrades in the first half.
The credit quality pressure on India Inc is likely to persist in the second half ending March 2021 (H2-21), with downgrades outnumbering upgrades, according to rating agency CRISIL.
The outlook for second-half outlook remains negative and will depend on policy and regulatory measures, and demand recovery.
While this (credit ratio fall) coincided with India’s sharpest gross domestic product (GDP) contraction on record (23.9 per cent in Q1Fy21), the credit ratio was cushioned to some extent by regulatory support.
Corporate credit profiles remain vulnerable even as demand claws back amid a raging Covid-19 pandemic.
Interestingly, while the rate of upgrades plunged as expected with the pandemic crushing demand, the rate of downgrades did not surge as feared. That’s because credit profiles were cushioned by proactive regulatory measures such as liquidity window made available through the corporate bond market.
The moratorium on debt servicing permitted by the Reserve Bank of India (RBI), and temporary relaxation in default recognition norms of credit rating agencies allowed by the Securities and Exchange Board of India (SEBI) also softened the impact on ratings. Without these, CRISIL’s credit ratio would have slid even lower.
Over the past six months, credit quality trends have clearly brought to the fore sectoral resilience in terms of demand, balance sheet strength and liquidity.
High-resilience sectors such as pharmaceuticals actually had a credit ratio of more than one in the first half of this fiscal, led by steady demand and robust balance sheets. On the other hand, moderate- and least-resilient sectors saw downgrades far outnumbering upgrades, because of the discretionary nature of goods and services, and leveraged balance sheets for several of them, CRISIL added.
Gurpreet Chhatwal, President, CRISIL Ratings said while the moratorium has provided near-term relief, demand recovery for moderate and least-resilient sectors will be protracted. Timely restructuring support from lenders will be crucial to credit quality.
The sectors to watch closely in the least-resilient category include airlines, gems and jewellery, auto dealers, hotels, and real estate. Sectors exhibiting moderate resilience include thermal power generators, textiles, retail, and roads and construction, it added.