Credit quality of India Inc has improved, but sustainability of this trend will be the key given the several headwinds that India Inc continues to face, according to credit rating agency Crisil’s analysis of rating actions in the first half of the current fiscal.

Crisil assessed that for the first time in the last 10 semi-annual periods, the debt-weighted credit ratio rose above one, which underscores value of debt upgraded is more than those downgraded, and surged to two times in the first half of fiscal 2017 compared with 0.2 times in the second half of fiscal 2016.

The debt that the agency has considered is outstanding on the books of the firms, excluding financial sector players.

The credit ratio (number of upgrades to downgrades) came in at 1.2 times compared with 0.8 times.

The agency said this is also the first time in the last 10 semi-annual periods that both these ratios have been above one simultaneously.

The significant change this time was the decline in the value of debt downgraded. At about ₹40,000 crore in the first half of this fiscal, it is the lowest and only a fourth of the ₹1.40-lakh crore average of the past 10 semi-annual periods.

The reason for this was less intense pressure on commodity-linked sectors, especially metals, following stabilisation of prices and policy support in the form of anti-dumping duty and minimum import price from the government, said Crisil.

According to the agency, there were 646 upgrades to 553 downgrades in the first-half.

Upgrades were concentrated in the domestic consumption-linked sectors such as auto ancillaries and packaging, and in the exports-linked pharmaceutical sector.

Downgrades were mainly in the investment-linked sectors such as construction, industrial machinery, real estate and metals. Financial (capital structure, debt protection and liquidity) and business (demand, profitability and working capital cycle) reasons contributed equally to rating actions.

Crisil observed that the focus now shifts to the sustainability of the improvement in credit quality.

“The investment cycle is yet to pick up, there hasn’t been a material de-leveraging in corporate balance sheets, and weak assets continue to mount in banking. To boot, global growth is also weak.

“Fresh rate cuts by the Reserve Bank of India, their transmission by banks, government’s continuing policy support, pace of implementation of reforms, and any sharp swings in rupee against the US dollar will be the other key monitorables,” said the agency.

Crisil expects the overall credit ratio to stay above one in the near term led by an expected rural leg-up to private consumption following a near-normal monsoon. However, debt downgrades in value terms is expected to be more in the second-half because of continuing pressure on the investment -linked sectors.

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