Corporate credit quality indicators have shown an improvement for the first time in nearly five years, said rating agency CRISIL in its semi-annual review released on Monday.
The debt-weighted credit ratio, which reflects the amount of debt on the books of companies downgrades compared to that on the books of companies upgraded, rose above one for the first time in five years, said the rating agency. This ratio stood at two for the first half of the fiscal compared to 0.2 in the second half of fiscal 2016.
This essentially means that the debt upgraded was twice the amount the debt downgraded. The ratio of the number of companies upgraded to those downgraded also rose to 1.2 times compared to 0.8 tomes in the second half of last year.
The significant change this time was thedecline in the value of debt downgraded. At Rs 0.4 lakh crore in the first half of this fiscal, it is the lowestand only a fourth of the Rs 1.4 lakh crore average of the past 10 semi-annual periods.Pawan Agrawal, Chief Analytical Officer, CRISIL Ratings
According to CRISIL Ratings, the improvement in the credit quality was due to improvement in the operating environment for commodity-linked sector, particularly the metal segment. The government's decision to impose a minimum import price (MIP) on steel imports has helped the sector stabilise.
Other sectors that showed an improvement in credit quality were domestic consumption linked sectors like auto ancillaries and packaging.
Overall, there were 646 upgrades to 553 upgrades.
The downgrades continue to come from investment-linked sectors such as construction, industrial machinery and real estate.
Is The Improvement Sustainable?
While the early signs of improvement in credit quality indicators is encouraging, CRISIL Ratings says it may be too early to decide how sustainable this is.
The rating agency expects the overall credit ratio to stay above 1 in the near term led by an improvement in private consumption. Investment linked sectors, however, may remain under pressure.
The proportion of debt held by stressed firms also continues to be high, suggesting that the improvement in corporate debt indicators will be gradual.
According to a September 27 report by Credit Suisse, the share of debt with companies having an interest coverage ratio of less than 1 inched up to 39 percent at the end of the first quarter compared to 38 percent in the previous quarter. Interest coverage ratio is a measure of a company's ability to make interest payments through its earnings. However, the share of debt lying with loss-making companies fell to 30 percent from 34 percent in the previous quarter, according to Credit Suisse, which first highlighted corporate debt concerns in India through its ‘House of Debt' report in 2012.
CRISIL also said it remains focused on how sustainable the improvement in credit quality is.
The focus now shifts to the sustainability ofthe improvement in credit quality. The investment cycle is yet to pick up, there hasn't been a materialdeleveraging in corporate balance sheets, and weak assets continue to mount in banking.Somasekhar Vemuri, Senior Director, CRISIL Ratings
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