Credit quality of Indian companies continued to strengthen in the first half of the current financial year as they maintained the strong performance of FY22 and FY23, according to rating agencies.

Strong domestic consumption and investments led to both investment and non-investment grade companies seeing an improvement in their credit profiles, even as the pace of improvement moderated to an extent.

Credit ratio, or instances of rating upgrades to downgrades, for investment grade companies, improved to 1.91-2.65 from 2.19-3.57 in H2 FY23. The upgrade rate moderated to 12.7-17 per cent but was higher than 10-year average of 10-16 per cent. The downgrade rate at 6-6.65 per cent was below the 10-year average of 7-8 per cent.

For non-investment grade ratings, the upgrade rate was 11 per cent, higher than the past 10-year average of 9 per cent whereas the downgrade rate was in-line with historical averages.

“Continued resilience in demand, early signs of an uptick in private capex, besides a supportive policy environment augur well for India’s economic activity,” said K. Ravichandran, Chief Rating Officer, ICRA.

The rating agency saw only one instance of default from a ‘BB-’ rated entity whereas India Ratings said the default rate was unchanged at 0.8 per cent compared with FY23.

“Our credit quality outlook remains positive with upgrades expected to outnumber downgrades for the rest of this fiscal, too. But downside risks have increased with inflation obstinately high and major central banks hawkish on interest rates” said Somasekhar Vemuri, Senior Director, CRISIL.

Upgrades vs downgrades

The number of upgrades outpaced downgrades, led by sectors such as hospitality, automobile and auto components/ancillaries, realty, renewable power, roads, financials, iron and primary steel, capital goods, dairy, metals and mining, FMCG, healthcare, infrastructure and engineering, construction and cement, and logistics services on the back of expansion in cash flows, government spending and domestic demand.

However, the intensity of upgrades moderated, barring the infrastructure and financial sectors, India Ratings said, adding that upgrades were led by mid-corporates whereas those for large corporates moderated given the higher pace seen in the last two fiscals.

Financial sector

Financial sector entities, including microfinance, saw better credit profiles on the back of steady credit growth, stable asset quality indicators, strong balance sheets and equity capital mobilisation. The credit ratio for the BFSI sector strengthened to 4.20 in H1FY24 from 1.91 in H2FY23, CARE Ratings said.

On the other hand, bulk of the downgrades were in SMEs with weaker credit profiles in chemicals, textiles and cotton spinning, diamond polishing, API/bulk drugs, and agro-based sectors, many of which were commodity or export-oriented. Other downgrades were due to sponsor-related issues, entity-specific liquidity mismatches and deterioration in financial metrics, and not due to operational performance-related factors.

ICRA said in the past six months, it has revised the outlook to ‘negative’ from ‘stable’ for three sectors – telecom, basic chemicals and the petrochemicals, and cut and polished diamonds.

As per the reports, erratic rainfall, elevated inflation and muted demand due to high food and crude oil prices, and impact of domestic monetary tightening on borrowing costs in addition to ongoing geopolitical risks and volatility in commodity prices remain the key concerns for corporate credit outlook.