Amidst slowing economic growth in the real estate sector and funding problems faced by the financial sector, there was a sharp rise in the number of rating downgrades in the first half of the FY20.
Rating agency ICRA downgraded the ratings of 266 companies at a rate of 14.6 percent (annualised) which was significantly higher than the past five-year average of 8.8 percent, ICRA said in a report. At the same time, instances of upgrades, at 170, witnessed a decline, as did the upgrade rate of 9.4 percent (annualised) which was relatively lower than the past five-year average of 10.2 percent, the report added.
These indicators show a rise in pressure on the credit quality of India Inc. For instance, the volume of debt downgraded by ICRA at Rs 5.2 trillion in H1 FY2020 was patently higher than the figure of Rs 3.2 trillion for the full FY2019.
"To a large extent, the sharp increase was attributable to the downgrade in debt of select financial sector entities, including housing finance companies, non-banking finance companies, and private sector banks. The debt of even non-financial sector experienced a substantial increase in downgrades contributed by companies in the power sector, construction sector, besides automobile OEMs," the ICRA report said.
Also, there was a marked increase in the proportion of ‘fallen angels’, which is the percentage of investment-grade stocks downgraded to the non-investment grade, the report stated. In H1 FY2020, this proportion rose to 7.7 percent (annualised), the highest since FY2013.
Commenting on the credit quality trends, Jitin Makkar, head-credit policy, ICRA, said that the credit quality pressures on India Inc have been persisting for several years now but the past 12 months have been particularly troublesome. He added that, while banking sector asset quality concerns have likely bottomed out, the non-banking sector concerns relating to asset quality of wholesale book, liquidity and asset-liability mismatches continue to brew.
"This, coupled with slowing economic growth because of sluggish consumption and investment demand, implies that credit quality pressures will take a while to dissipate. Nevertheless, despite the sombre trends overall and risk aversion being shown by investors in general, the relatively stronger corporate and financial sector entities have been able to attract large volumes of capital, even higher than in the past," Makkar stated.
The government of India (GoI) has taken several measures lately to stimulate economic growth and invigorate financial sector health, particularly that of the public sector banks. Also, in a bid to support growth, the Reserve Bank of India (RBI) has cut the repo rate for a fifth consecutive time.
However, the efficacy of these measures in inducing a turnaround in economic growth and supporting improvement in credit profiles over the near term would hinge on the alleviation of various other demand-side and supply-side concerns, ICRA added.
First Published: Oct 8, 2019 12:09 PM IST
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
PM Modi to chair seven meetings on June 2 to decide next 100 days in office
Jun 2, 2024 11:35 AM
Lok Sabha Election 2024 | Five key takeaways from the exit polls for BJP and the opposition
Jun 2, 2024 9:16 AM