Pandemic grips credit quality, weakens credit ratio
Intensifying COVID-19 or the Coronavirus pandemic and a looming global recession have cast an unprecedented cloud over the credit quality outlook of India Inc, which has already been impacted by a slowing economy. This has forced CRISIL to slash its base-case gross domestic product (GDP) growth forecast for fiscal 2021 to 3.5 per cent. The impact of a slowing economy has already started reflecting in rating actions with downgrades (469) outnumbering upgrades (360) in the second half of fiscal 2020, and CRISIL’s credit ratio sliding to 0.77 time compared with 1.21 times in the first half.
Amid intensifying credit pressures, timely measures by the Reserve Bank of India (RBI) to permit banks to offer moratorium on servicing of bank loans until May 2020 comes as a big breather in the immediate term. However, over the near to medium term, credit quality trends would be driven by the ability of companies to rebound from the near-standstill demand situation.
Says Gurpreet Chhatwal, President, CRISIL Ratings, “We foresee India Inc’s credit quality deteriorating in the near-term. Our study of 35 sectors, both from manufacturing and services, however, shows sharp variation in resilience in a post-COVID-19 landscape. Strong balance sheets or continuing demand will support some sectors during the current lockdown. However, some other sectors could be hampered by collapsing discretionary demand or high leverage.”
These 35 sectors account for ~71 per cent of the debt (excluding financial sector) in CRISIL’s rated portfolio. Among the conclusions of the study are:
In the financial services segment, the lockdown restrictions will have a near-term impact on both collections and fresh loan disbursements.
While the RBI moratorium provides some relief on the assets side, it is on liabilities side that challenges could emerge for non-banking financial companies (NBFCs) with high share of capital market borrowings. That’s because no moratorium has been announced so far for capital market borrowings (such as bonds and commercial paper) and repayments on these will have to be made on time, during a period when collections would be impacted significantly.
Most NBFCs rated investment-grade by CRISIL have high levels of liquidity and/or enjoy strong parentage. CRISIL’s analysis of the top 100 rated NBFCs indicates that majority have liquidity buffer of over two times towards repayment of capital market borrowings due in the next two months.
In terms of resilience of the underlying asset classes, CRISIL’s analysis reveals that:
Says Somasekhar Vemuri, Senior Director, CRISIL Ratings, “Supportive measures from the Government of India and the RBI have eased cash flow pressures in various sectors for now. As the lockdown is lifted, credit profiles will be back to being driven by fundamentals – namely, pace of economic recovery, demand resilience in respective sectors, and normalisation of working capital cycles.”
However, the duration, spread and intensity of the pandemic will continue to materially impact the credit outlook for fiscal 2021, with rating downgrades likely to far outnumber upgrades.
Further fiscal and/or monetary support will be a monitorable for any upside to this expectation.
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