Rating agency ICRA, on Thursday, said the pace of rating downgrades of its rated portfolio has accelerated while the upgrades have nearly dried up in the backdrop of the rapid spread of the novel coronavirus (Covid-19) across the globe and in India.

The pace of rating downgrades has accelerated, with the average monthly downgrades increasing by 22 per cent period between March 1 and May 15,compared to the monthly average of FY20.

Of the 315 negative rating actions taken by the credit rating agency on the non-financial sector entities during the period, a majority of them were attributable to the pandemic outbreak.

ICRA said nearly half of these negative rating actions have been downgrades (150), while a significant proportion has also undergone a change in outlook to negative (122).

However, negative rating actions have so far impacted only 9.6 per cent of the rated portfolio of corporate sector entities.

Given the current uncertainties with regards to the pandemic and the evolving situation, 43 entities were also placed on Ratings Watch.

High-risk sectors

The agency observed that negative rating movements have been more in sectors that were at high risk from the impact of the pandemic. Of the top 10 sectors that witnessed a negative rating action since March, a large proportion were those that were categorised as ‘high risk’ by ICRA. These included sectors such as aviation, hotels and restaurants, retail, and ports.

The agency said this underscores the aspect that these sectors are more vulnerable to business disruptions caused by the pandemic and, accordingly, the credit quality of entities is likely to be more impacted than other sectors.

On the other hand, several ‘low risk’ sectors such as FMCG, sugar, seeds, and utilities have not experienced negative rating action during this period, despite a large portfolio-base (100+ entities), highlighting their relative resilience to the pandemic.

Shamsher Dewan, Vice-President-Corporate Ratings, ICRA, opined that there has been a need to review the creditworthiness of rated entities, especially in sectors hard-hit by the pandemic.

“With the impact of the pandemic across sectors being multifold, including slowdown in domestic demand and the global economy, supply chain disruptions, foreign exchange rate fluctuations, and commodity price impact, among others, and the general uncertainty with regard to timing of revival, negative rating actions have increased, while upgrades have dried up,” he said.

ICRA noted that most downgrades have been more prevalent in the lower rating categories, especially the non-investment grade. Negative rating actions in the investment grade have been mostly related to either being placing the Ratings Watch or change in the outlook to Negative.

Additionally, for many smaller entities, lack of adequate information (given their relatively weaker information systems and operational constraints faced in data-sharing) has been a challenge in credit assessment during this period, though these instances have largely been restricted to the entities rated in the non-investment grade.

Dewan said that as credit conditions evolve, ICRA continues to closely monitor the quality of its ratings and would be taking rating actions as warranted to reflect the breadth and the severity of this crisis. The spurt in negative rating actions make managing the trade-off between rating accuracy and rating stability more challenging, he added.

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