Covid will lead to additional ₹1.67-lakh crore of debt from top-500 debt-heavy private sector borrowers: India Ratings

The proportion of stressed debt of the top-500 debt-heavy private sector borrowers could jump to 18.21 per cent to 20.84 per cent of the outstanding debt against 11.57 per cent that is already stressed, warned India Ratings (Ind-Ra).

The credit rating agency has considered the impact of Covid and the associated policy response, and also a scenario where funding markets continue to exhibit heightened risk aversion for coming to the aforementioned assessment of corporate stress.

As per an Ind-Ra report, the impact of Covid and the associated policy response is likely to result in an additional ₹1.67-lakh crore of debt from the top-500 debt-heavy private sector borrowers turning delinquent between FY21 and FY22.

This is over and above the ₹2.54-lakh crore anticipated prior to the onset of pandemic, taking the cumulative quantum to ₹4.21- lakh crore, as per the credit rating agency’s assessment.

This constitutes 6.63 per cent of the total debt (previous estimate: 4 per cent).

Given that 11.57 per cent of the outstanding debt is already stressed, the proportion of stressed debt is likely to increase to 18.21 per cent of the outstanding quantum, said Arnidam Som, Senior Analyst, in a report.

Ind-Ra expects the corresponding credit cost to be 3.57 per cent of the total debt.

Further downside risks

The agency believes that in a scenario where funding markets continue to exhibit heightened risk aversion, corporate stress could increase further by ₹1.68-lakh crore, resulting in ₹5.89-lakh crore of the corporate debt (9.27 per cent of the total debt) becoming stressed in FY21 to FY22.

The resultant credit cost could be higher at 4.82 per cent of the outstanding book. Consequently, 20.84 per cent of the outstanding debt could be under stress in the agency’s stress case scenario, the report said.

Although further revisions in the FY21 GDP growth expectations by itself may not lead to a change in Ind-Ra’s stress estimates, the risk of a significantly prolonged recovery in the economic activity through FY22, and a larger-than-anticipated dent on demand could even result in stresses surpassing the agency’s stress-case estimates.

The report cautioned that the progression of the pandemic, the policy response and its impact on economic growth, the actual build-up of stress could result in higher default rates and credit costs, in line with the peak levels experienced in the last decade.

Som observed that as economic uncertainties continue to linger, lenders, despite adequate liquidity, are most likely to deploy their capital at the upper end of the credit curve with a shorter tenure.

Lenders may turn even more selective, weakening the resource mobilisation ability of lower rated issuers in the investment grade, including those rated in the ‘A’ and ‘BBB’ categories, the report said.

Consequently, these issuers are at the greatest risk of facing rating transitions in FY21, although the rating sensitivities for various higher rated corporates could also be tested.

Credit growth to fall 15%

According to the agency, tepid corporate capex (capital expenditure) coupled with muted revenue is likely to restrict credit growth in FY21.

However, refinancing pressures will persist and securing timely funding could continue to prove challenging.

Ind-Ra expects the ₹4.81-lakh crore of fresh credit demand by the top 500 debt-heavy private sector corporates to emanate from a mix of receivable financing, and a further drawdown of unutilised bank limits to shore up liquidity, meet cash flow shortfalls, and to fund various isolated pockets of capex spending – largely restricted to maintenance capex.

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