With the window for restructuring under the Resolution Framework 2.0 of the Reserve Bank of India closing on September 30, there was minimal utilisation of it as anticipated¹. Less than 1% of the eligible companies² in the Crisil Ratings portfolio opted to restructure their debt through the facility.

The tepid response — despite an intense and more virulent second wave of the Covid-19 pandemic — reflects the positive turn in demand outlook, and anxiety about negative stakeholder perception of restructured companies.

To assess the extent of recovery in demand and the resilience³ of sectors, Crisil Ratings uses a propriety framework⁴. This tracks resilience across 43 sectors that account for 76% of the total corporate debt rated by Crisil.

The exercise indicated 37 sectors have seen demand rebounding to, or near, the pre-pandemic levels. The impact of the second wave on the cash flows of companies has been relatively short-lived due to localised and less-stringent restrictions compared with the first wave.

Says Subodh Rai, Chief Ratings Officer, Crisil Ratings, “Around 88% of the rated debt under the framework is in sectors where demand has or is expected to fully recover in current fiscal to the pre-pandemic levels. These include essentials such as FMCG, pharma and telecom, and infrastructure-linked sectors such as cement, power, roads and construction. Such a broad-based recovery has helped reduce the need for restructuring among corporates in Crisil’s rated portfolio.”

Also, the continuation of strong government support — such as the expansion of the scope of the Emergency Credit Line Guarantee Scheme (ECLGS) and its extension till March 31, 2022 — has helped companies manage temporary liquidity disruptions. This is especially true for micro and small enterprises, which are experiencing relatively higher stress. ECLGS reduces the need for them to go for Restructuring 2.0.

The impact on long-term credit history also kept away many companies. That’s because, lenders would classify their accounts as ‘restructured’, which would impair their ability to raise debt in future.

None of the Crisil-rated companies opting for Restructuring 2.0 had a rating in the investment-grade category (‘BBB’ or higher), where credit profiles are relatively stronger.Even among the companies in the sub-investment grade category (‘BB’ or lower) — where weaker credit profiles abound — a significant 98% did not seek restructuring.

It is pertinent to note that these findings are limited to Crisil-rated companies, which are largely mid- to large-sized. Hence, they may not reflect the predicament of micro and small enterprises, very few of which are rated in any case.

In the road ahead, a third wave of the pandemic, if it lands, and its impact will bear watching.

¹ https://www.crisil.com/en/home/newsroom/press-releases/2021/08/few-takers-for-restructuring-2point0-amid-demand-recovery.html
² Companies having bank loan exposure of up to Rs 50 crore and are standard accounts as on March 31, 2021
³ Sectoral resilience measures ability to withstand future disruptions/shocks. It is based on category of goods (essential/ non-essential); nature of demand (discretionary or non-discretionary); balance sheet strength in terms of leverage and liquidity available for entities in the sector; and the level of government/ regulatory support to the sector.
⁴ For further details, please refer to the Crisil Ratings report titled ‘A positive turn’, dated October 1, 2021