A sprightly recovery in demand has spawned guarded optimism about the credit quality of India Inc, and led to CRISIL’s credit ratio (upgrades to downgrades) inching closer to 1 between October and February this fiscal.

These five months saw as many as 244 upgrades compared with 161 for the whole first half. Downgrades continue to be material because the end of moratorium on debt servicing has impacted vulnerable companies.

Says Subodh Rai, Chief Ratings Officer, CRISIL Ratings, “The improvement in the credit ratio was driven by more upgrades in moderately resilient sectors¹ such as construction, engineering and electricity generation, which got support from the relaxation of lockdown, revival in demand and higher commodity prices. In comparison, the credit ratio for the first half had fallen to a decadal low of 0.54.”

Notably, despite the acute stress faced, the past 11 months saw ~55% fewer downgrades to default, on-year. That’s primarily because of emergency regulatory and policy support such as loan moratorium, relaxation in default recognition up to December 2020, one-time restructuring relief and emergency credit line guarantee scheme.

The extent of increase in stress among companies and, in turn, for banks and non-banks, will be the monitorable in the road ahead, even as improving demand provides offset.

Highly resilient sectors such as pharmaceuticals and agrochemicals performed well owing to sustained demand. The credit ratio for these sectors remained above 1 even during the bleakest period of the pandemic.

The turnaround has been sharper in investment-linked sectors such as construction and engineering, and consumption-linked sectors such as packaging, where the credit ratio has already doubled compared with the first half, supported by macroeconomic revival.

However, in low-resilience sectors such as hotels and resorts, real estate developers and airport operators, downgrades continue to outpace upgrades owing to their discretionary nature and leveraged balance sheets.

The budget for next fiscal, given its focus on public investments, is expected to crowd in private investments and give a fillip to economic growth² over the medium term. That said, excess borrowing by government will crowd out private borrowing.

Says Akshay Chitgopekar, Director, CRISIL Ratings, “We maintain a cautiously optimistic outlook on credit quality for the near to medium term, supported by normalisation of economic activity, good agriculture performance and sustained rural demand, and the budget prop to infrastructure investments. However, a second wave of pandemic, especially with mutations that undermine the effectiveness of current vaccines, leading to containment measures can derail the ongoing recovery.”

Other downside risks to the outlook include slower-than-anticipated demand growth, especially for services, continuing job losses, and sub-par implementation of the growth-oriented fiscal measures in the budget.

¹ See CRISIL Ratings press release, ‘Credit ratio at a decadal low of 0.54 in the first half’ dated October 3, 2020’. Since the onset of the Covid-19 pandemic, CRISIL Ratings categorised 42 sectors (excluding the financial sector) into three categories: high, moderate and least resilience sectors. Sector resilience is defined as the ability to endure the revenue impact of the pandemic and bounce back to full production in a post-pandemic scenario. It is assessed using a multi-variable framework that comprises category of goods, nature of demand, balance sheet strength of entities in the sector, and the level of government/regulatory support available to the sector.
² See CRISIL publication ‘Going for Growth: Union Budget 2020-21’ for more details.