The moratorium on loan repayments provided by banks at the behest of the Reserve Bank of India (RBI) has provided much-needed liquidity support to mid-sized sub-investment grade (rated CRISIL BB+ or lower) companies. It has also prevented a sharp weakening of their credit profiles.

While the moratorium ended today, debt restructuring announced by the RBI recently can play a crucial role in supporting the credit profiles of mid-sized companies.

CRISIL analysed over 2,300 non-financial companies (from its rated portfolio) that availed of the moratorium to tide over Covid-19 pandemic-induced cash-flow challenges, after categorising them by rating, sector and size. It revealed divergent trends.

Three out of four entities that availed of moratorium are rated in the sub-investment grade. Most of them were grappling with a slowing economy before the pandemic began. The severely curtailed business activity that followed in the first quarter of this fiscal had cramped cash flows, so the moratorium came as a big relief.

Only one out of four companies that availed of the moratorium is rated in the investment grade (rated CRISIL BBB- or higher). They took recourse to the moratorium to build a liquidity cushion for exigencies in the near term.

Says Subodh Rai, Senior Director, CRISIL Ratings, “Companies in sectors impacted the most by the pandemic have been the keenest to avail of the moratorium. While every sector has been affected by the dislocations stemming from the pandemic, majority of those with lower resilience^* have availed of the moratorium. Few among the more-resilient ones have done so.”

Every fifth company in highly impacted sectors such as gems and jewellery, hotel, auto components, automobile dealers, power (power utilities, independent power producers and energy traders), packaging, and capital goods and components availed of the moratorium. On the other hand, only one in ten did from less-impacted sectors such as pharmaceuticals, chemicals, FMCG, secondary steel and agriculture.

Size has also been a differentiator with few relatively bigger businesses going for it. In the mid-sized corporate segment (Rs 300-1,500 crore turnover), the number of companies availing of the moratorium was more than thrice those in the Rs 1,500 crore and above turnover range.

Says Rahul Guha, Director, CRISIL Ratings, “The moratorium has been crucial in averting sharp downward rating actions in the face of shrinking turnover and declining profitability. It helped companies manage the sudden stretch in working capital cycles and cash flows amid the bleak business environment.”

While the moratorium ended today demand outlook in most sectors remains muted. In particular, companies falling in the low resilience sector will continue to remain under stress over the next two to three quarters.

To support corporates impacted by the Covid-19 induced slowdown, the RBI has introduced a one-time debt restructuring plan. Taking timely recourse to this facility can help companies manage their cash flows that, in turn, will provide support to their credit profiles.

*Sectoral resilience is the ability of a sector to sustain the revenue impact of Covid-19 and bounce back to full production after the pandemic peters out. This is calculated after taking into account end-product linkages with discretionary/non-discretionary spending, demand elasticity, and strength of the balance sheet. This has been covered in detail in the CRISIL Ratings Round-Up, ‘Pandemic to weigh on India Inc’s credit quality’ released on April 3, 2020.