Credit quality pressures intensified for India Inc in the first half of fiscal 2020, driven by an interplay of factors including global and domestic economic slowdown, sharp fall in consumption demand, and slower government spending. Constrained access to funding also affected the credit profiles of entities across sectors, especially non-banks and real estate.

Crisil’s debt-weighted credit ratio (value of debt¹ upgraded to downgraded) plunged to 0.25 time in the first half of fiscal 2020, compared with 1.65 times for fiscal 2019.

The value of debt downgraded more than trebled to Rs 1.38 lakh crore in the first half of fiscal 2020 from Rs 39,000 crore in the first half of fiscal 2019. That’s the highest for any half since fiscal 2016.

Says Somasekhar Vemuri, Senior Director, Crisil Ratings, “Across rating categories, entities with higher leverage saw more downgrades as pressure from the demand slump intensified. Declining profitability and stretch in working capital cycles also were reasons for the downgrades. On the other hand, those with lower leverage withstood the demand-side challenges better.”

Over the past five fiscals, the median gearing for Crisil-rated companies² has improved from 1.3 times to 0.9 time, which reflects both, deleveraging that’s been underway and resilience to demand pressure.

That also explains why, upgrades continue to outnumber downgrades despite a sharp decline in Crisil’s credit ratio (upgrades to downgrades) for the first half of fiscal 2020 to 1.21 times³ – the lowest in the past six half-yearly assessments, and down from 1.73 times for fiscal 2019.

The fall in credit ratios was across investment-, export-, and domestic-consumption-linked sectors.

Among investment-linked sectors, construction and allied accounted for over 30% of downgrades because of delays in project execution and stretched liquidity.

Export-linked sectors reported a mixed performance, with pharmaceuticals (especially bulk drugs) continuing to benefit from supply constraints in China. Gems & jewellery and readymade garment exporters saw more downgrades because of constrained access to funding, lower export competitiveness, and weak demand.

Among consumption-linked sectors, auto components and other auto-related sectors accounted for ~15% of the downgrades. However, the credit profiles of automobile manufacturers remain cushioned by strong balance sheets.

In the financial sector, a year since the funding squeeze began for non-banks, challenges persist for those with wholesale-oriented loan books. While measures announced by the government and the Reserve Bank of India to improve flow of credit to the sector, and sharper focus of non-banks on their asset-liability maturity profiles, are welcome, access and cost of funding will remain the key monitorables.

For banks, non-performing assets are expected to continue to decline from the 9.3% estimated at the end of fiscal 2019, because of fewer fresh slippages and faster recoveries after the recent changes to the Insolvency and Bankruptcy Code. Infusion of capital, especially for public sector banks, and emphasis on retail credit book expansion, should drive growth.

Says Gurpreet Chhatwal, President, Crisil Ratings, “We remain cautious about the credit outlook for the second half because demand pressures persist. Going forward, how well demand recovers after a good monsoon, the sharp cut in corporation tax, faster and automated release of Goods and Services Tax refunds, and higher export incentives will be the key monitorable.”

It is pertinent to note that Crisil’s default and stability rates have remained robust despite the sharp decline in credit ratios in this challenging credit environment. Best-in-the-industry performance of Crisil’s ratings is a testimony to its analytical rigour and proactive surveillance.

¹ Debt upgraded or downgraded refers to the total domestic financial obligations for the entities whose ratings were upgraded or downgraded. Financial sector entities and non-cooperative issuers are excluded.
² Excluding financial sector entities and non-cooperative issuers.
³ 529 upgrades to 438 downgrades. Does not factor in rating actions on non-cooperative issuers.