Poor credit quality continues in H1: Crisil

The decline in credit quality continued for the first six months of the financial year 2008-09, where three long-term ratings were downgraded, and only one was upgraded.

According to a Crisil report, given the unprecedented severity of the global financial turmoil and the significant economic slowdown, the next 12 months will be critical for credit quality.

“Modified credit ratio (MCR), a key indicator of the credit quality, showed a secular decline from 1.16 times in 2004-05, to 0.98 times in these six months. This time, the intensity of the decline and the level of MCR are less adverse than in the previous period of continuous fall, which included a historic low of 0.61 in 1998-99, because both manufacturing and financial sector entities now have much stronger balance sheets,” the report said.

 

After three years without any defaults, in this period, there were two defaults in Crisil’s portfolio of long-term ratings, where both defaulting companies were manufacturing sector entities.

The report attributes this to the sharp pull-back in the Index of Industrial Production (IIP) growth rate, as both are inversely correlated as per the agency’s research.

For example, in 2005-06, the default rate was zero with the corresponding IIP growth beyond 8 per cent. Similarly, the reappearance of defaults in the first half of 2008-09 has been accompanied by a sharp pull-back in the IIP growth rate.

The report pointed out that the real estate sector was the most vulnerable amid mounting funding pressures thereby affecting creditworthiness.

For the first time since Crisil introduced ratings, that 5 per cent of its long-term ratings had negative outlooks.

“The demand slowdown in sectors such as textiles, information technology and automobiles has begun; sectors such as telecommunications and power would be less vulnerable to such a slowdown. The banking sector benefits from government support and strong capitalisation. These mitigate profitability pressures due to higher funding costs and mark-to-market requirements on investment portfolios, and asset quality pressures due to a slowing economy,” the report added.

While the resources and business profiles of the NBFCs might come under stress on the wake of the tight liquidity situation in financial markets.

However, the larger NBFCs appear to be relatively well-placed in terms of cash on their books and access to bank funding.