Credit ratio rebounds to 1.33 as demand recovery takes root: Crisil

Starting the fiscal year 2021-22 on a cautiously optimistic note, two rating agencies on Thursday said the credit quality of India Inc indicates signs of improvement. Rating upgrades outpaced downgrades with the economy on the mend but stringent measures to contain the Covid-19 pandemic could impact recovery.

Crisil Ratings said credit ratio (upgrades to downgrades) scaled to 1.33 in the second half of 2020-21 – with upgrades and downgrades at 294 and 221, respectively – from a decadal low of 0.54 in the previous half. It attributed this to strengthened demand recovery, GDP growth returning to positive in the third quarter.

The debt-weighted credit ratio too increased to 1.26 from 0.52.

“The impetus to infrastructure development in Union Budget 2021-22, steady farm performance and sustained rural demand, together with rollout of vaccination, hold promise for continued improvement in the credit quality of India Inc. even as the spectre of a second wave of Covid-19 infections looms large,” Crisil Ratings said.

It further noted that there were fewer downgrades across the spectrum in the second half of the fiscal year

Noting that the ECLGS provided liquidity support to jump-start business activity in the second half of the fiscal, Subodh Rai, Chief Ratings Officer, Crisil Ratings said, “But the biggest driver for the increase in credit ratio were the unlock measures, which released pent-up demand across sectors, kick-started the economy and got cash flow from operations flowing for India Inc.”

ICRA’s view on credit quality

Ratings agency ICRA also said ‘the credit quality of India Inc has experienced two consecutive years of elevated pressures, but recent trends suggest that the trough is behind us.’

“While on a full-year basis, both FY2020 and FY2021 marked a sharp rise in the proportion of entities downgraded in ICRA’s portfolio (vis-à-vis the historical averages), the rating action trends since November 2020 suggest that incremental downgrade pressures have ebbed,” it said in a statement. ICRA noted that the proportion of rating upgrades has been on the rise over the past two quarters.

The agency downgraded the ratings of 483 entities in 2020-21 reflecting a downgrade rate of 14 per cent, coming on the heels of an even higher downgrade rate of 16 per cent seen in 2019-20.

“The proportion was much higher than the preceding five-year average of 8 per cent, reflecting the elevated credit pressures seen in the past two years,” it noted.

In comparison, the ratings of 293 entities were upgraded by ICRA last fiscal.

Since November 2020, the credit ratio of ICRA - assigned ratings, defined as the ratio of the number of entities upgraded to the number of entities downgraded, has consistently remained upwards of 1x time every month, it said, adding that earlier, the Credit Ratio had remained consistently below 0.6x every month since May 2019.

K Ravichandran, Deputy Chief Rating Officer, ICRA, said, “The credit quality trends in the near-to-medium term would remain sensitive to the span of Covid-19 infections and the attendant demand and supply-side disorders that it may engender.”

“Overall, while the credit quality challenges for India Inc. are expected to abate in the near term, compared with the past two years, the seeds of a reassuring and a broad-based recovery are yet to take root,” said Jitin Makkar, Head-Credit Policy, ICRA.

Somasekhar Vemuri, Senior Director, Crisil Ratings also noted that the sharp rise in Covid-19 cases since mid February and the impact of any stringent containment measures on businesses are the key threats to the nascent demand recovery and could impact the credit quality outlook adversely.

“That said, the Crisil Ratings’ resilience study of 42 sectors indicates that only six (accounting for four per cent of rated debt) are highly sensitive to a Covid-19 resurgence, while 20 are moderately sensitive,” he said.