Corporate Credit Quality Improves But Still On Shaky Ground, Say Rating Agencies

Credit quality of Indian corporates is improving albeit at a slow pace, said rating agencies CRISIL and ICRA in separate releases on Monday. Both felt that while there is gradual improvement in the level of indebtedness among Indian firms, corporate balance sheets remain stretched. This, in turn, will mean that bad loans in the banking sector will remain elevated.

In its semi-annual rating summary, CRISIL said that the debt-weighted credit ratio improved to a five-year high of 0.88 times in fiscal 2017 compared to 0.31 times in fiscal 2016. The debt weighted credit ratio reflects the ratio of debt upgraded versus that downgraded.

The improvement in the debt weighted credit ratio was driven by firm commodity prices, a stable macro economy, improving capital structure and lower interest costs, said CRISIL in its release. Going forward, we expect the gradual improvement in credit quality to sustain, the rating agency added.

During the fiscal year, there were 1335 upgrades and 1092 downgrades among the CRISIL rated universe of companies.

Demonetisation proved to be short term blip from a ratings standpoint, said Crisil.

While the liquidity position of companies was adversely impacted, companies found work-around solutions by conserving liquidity, tighter inventory management and support from creditors. Lower demand reduced the need for working capital and bank credit lines came to rescue during the months of currency shortage, said Crisil.

While corporate credit quality continues to improve slowly, bad loans in the banking system may remain elevated, CRISIL said. The rating agency expects the stock of gross NPA to rise and recoveries to remain subdued.

It expects absolute gross non performing assets (NPAs) and weak assets for the banking sector to touch Rs 7.8 lakh crore and Rs 8.7 lakh crore respectively by March 31, 2017. The percentage of gross NPA is expected to rise to 10.6 percent by March 31, 2018.

Peer rating agency ICRA struck a similar tone in its review. While debt downgrades declined sharply in fiscal 2017, there are few signs of a “definitive improvement”, said ICRA. It added that the pace of improvement would only be gradual as businesses recover from balance sheet stress.

In the just concluded financial year, ICRA upgraded the ratings of 603 entities and downgraded the ratings of 517 entities. The rating agency had outstanding ratings on 7000 entities at the start of the year. While the proportion of entities downgraded has broadly remained in the range of 7-8 percent for three consecutive years, the value of the debt downgraded has been reducing, the rating agency said.

While the rating agencies struck an optimistic note, recent data from the Reserve Bank of India showed that credit metrics of Indian firms worsened in the December quarter. Brokerage house Credit Suisse had also cautioned on corporate credit quality in a February report and noted that bank NPAs and provisioning requirements for Indian banks may remain high in 2017-18.

Also Read: Bad Loan Clean-Up: It Ain't Over Till It's Over