The credit quality of India Inc has improved but it remains fragile, according to Crisil Ratings.

“Since some sectors continue to struggle and several large companies remain highly indebted, underpinnings remain fragile,” the rating agency said.

As a result, the gross non-performing assets (GNPAs) in banking are expected to remain at elevated levels.

Crisil’s credit ratio for fiscal 2017 stood at 1.22 times, which is similar to the 1.29 times seen in fiscal 2016, while its debt-weighted credit ratio improved to a five-year high of 0.88 time compared with 0.31 times last fiscal.

“The improvement in the debt-weighted credit ratio was driven by firm commodity prices, stable macros, improving capital structure, and lower interest costs. We expect the gradual improvement in credit quality to sustain,” said Gurpreet Chhatwal, President, Crisil Ratings.

There were 1,335 upgrades and 1,092 downgrades during the year. Upgrades continued to be driven by companies from the consumption-linked sectors, while downgrades continued to be driven by companies from the investment-linked sectors.

The impact of demonetisation on credit quality is expected to be transient.

Crisil expects upgrades to outnumber downgrades in the near term driven by improving domestic consumption demand. Also, several sectors such as metals (especially non-ferrous), and sugar are expected to see improvement in credit quality in fiscal 2018 due to increasing prices.

Somasekhar Vemuri, Senior Director, Crisil Ratings felt recoveries would stay subdued given that sizeable NPAs were in highly leveraged companies with stretched cash flows.

Several investment-linked sectors such as real estate and capital goods continue to see headwinds. Microfinance institutions (MFIs) are also seeing a build-up in stress. Also, many major corporate houses with high indebtedness would remain stressed in the near-term.

While Crisil expects credit quality to improve in 2017-18, the pace of improvement hinges on balance sheet deleveraging through asset sales, another spell of normal monsoon, a pick-up in the investment cycle and effective implementation of reforms (especially GST), among others.

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