India Ratings Estimates Corporate Stress Could Rise To 18.21% By FY22

India Ratings & Research Pvt. expects the pandemic to worsen corporate stress in the next two financial years.

Stressed corporate debt could rise to 18.21% of outstanding debt by March 2022, from 11.57% currently, the rating agency said in a statement.

About Rs 1.67 lakh crore worth debt by top 500 debt-heavy private companies could turn delinquent in FY21 and FY22 owing to the Covid-19 pandemic and the associated stress, India Ratings estimates. This is over and above Rs 2.54 lakh crore worth of debt estimated to turn sour during this period before the onset of the pandemic.

Together, this Rs 4.21 lakh crore represents 6.63% of outstanding corporate debt. The rise in delinquent debt will push up credit cost to 3.57% of the outstanding book by FY22 for the entire system, the rating agency said.

In the worst-case scenario, according to its stress test on corporate debt, if credit markets continue to show high risk aversion, the level of additional delinquent debt could increase to Rs 5.89 lakh crore by March 2022.

“The resultant credit cost could be higher at 4.82% of the outstanding book. Consequently, 20.84% of the outstanding debt could be under stress in the agency's stress case scenario,” it said.

A further downward revision in gross domestic product growth estimates for FY21 may not materially change the agency's expectations.

As lenders turn more cautious and lend to only the top-rated companies, credit growth could drop 15%, India Ratings said. The Rs 4.81 lakh crore fresh credit demand by the top 500 debt-heavy private sector corporates will come from a mix of receivable financing and a further drawdown of unused bank limits to shore up liquidity, it said. This fresh credit will help companies meet cash-flow shortfalls and to fund various isolated pockets of capex spending—largely restricted to maintenance capex.

India Ratings warned that if the accumulation of stressed debt goes beyond the top 500 debt-heavy private companies, the impact on could be far more severe. This could lead to lenders turning even more selective when extending debt. Companies rated A and BBB could see weaker resource mobilisation and are at a higher risk of rating downgrades in FY21, it said. Rating sensitivities for higher-rated corporates could also be tested, the rating agency said.

On June 30, Standard and Poor's had estimated that the gross non-performing asset ratio for Indian banks could rise to a two-decade high of 13-14% in FY21 from 8.5% as of March 2020, because of the disruption caused by the pandemic and the resultant lockdown.