India Inc’s debt servicing woes, which seemed to be getting better from FY15 to FY19, now seem to be taking a distinct turn for the worse. Data from CRISIL shows that the debt-weighted ratio of its rating upgrades to downgrades deteriorated sharply from 1.65 times in FY19 to just 0.25 times in the first half of FY20, with the value of downgraded debt at four times upgraded debt. This is the first time that this ratio has plummeted below one since FY14. While the number of upgraded firms exceeds downgrades, this is small comfort because the most heavily leveraged members of India Inc are obviously facing renewed challenges to debt servicing. CRISIL attributes this to the slowing economy, a fall in consumption demand, slower government spending and constrained credit access. It is also entirely possible that rating agencies, stung by strident criticism of their belated reactions to corporate distress, are now getting their acts together. Whatever the reasons though, that India Inc should face such difficulties after the Monetary Policy Committee has aggressively cut policy rates by over 200 basis points in the last couple of years is troubling. The highly leveraged members of India Inc seem to have limited wherewithal to survive any renewed pressure on profits from an extended slowdown.

Apart from flagging the overall deterioration in credit ratios, the CRISIL study offers three key granular takeaways. One, it notes that export-linked sectors alone held their heads above water as both consumption and investment-linked sectors slumped. But with brewing trade wars posing a potent threat to exports, this may not last. Nor will the recent corporate tax cuts, which mainly benefit non capital-intensive sectors, solve this problem. A pick-up in the private capex cycle, on which the Centre has been pinning its hopes for a growth revival, may therefore be deferred well beyond a quarter or two. Two, while credit ratios are worsening, the de-leveraging of India Inc’s balance sheet at an aggregate level is expected to continue, with the debt/EBIDTA ratio expected to improve from 2.97 times in FY19 to 2.71 times in FY20. Policymakers need to do their bit to help this process along, by addressing irrational risk aversion among bankers and ensuring effective transmission of rate cuts to non-AAA borrowers. Three, India Inc’s debt situation continues to be a tale of two halves, with some sectors sitting on stockpiles of cash while others flounder. Doing away with retrograde taxes on dividends and buybacks that actively impede the free flow of capital between sectors, can help.

Overall, India Inc’s debt problems seem set to get worse before they get any better. Should the economic downturn prolong, India’s beleaguered banks, non-bank lenders, bond market participants and retail investors may have to brace for yet another rash of defaults and write-downs, even as they’re struggling to come to terms with the after-effects of the previous NPA cycle.

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