CRISIL’s rating actions in fiscal 2017 indicate credit quality of India Inc is gradually recovering, but the underpinnings remain fragile because some sectors continue to struggle and several large companies remain highly indebted. As a result, the gross non-performing assets (GNPAs) in banking are expected to remain at elevated levels.
CRISIL’s credit ratio for fiscal 2017 stood at 1.22 times, which is similar to the 1.29 times seen in fiscal 2016, while debt1-weighted credit ratio improved to a five-year high of 0.88 times compared with 0.31 time last fiscal.
A reading above 1 indicates upgrades outnumber downgrades.
Says Gurpreet Chhatwal, President, CRISIL Ratings: “The improvement in the debt-weighted credit ratio was driven by firm commodity prices, stable macros, improving capital structure, and lower interest costs. We expect the gradual improvement in credit quality to sustain.”
There were 1,335 upgrades and 1,092 downgrades during the year. Upgrades continued to be driven by companies from the consumption-linked sectors, while downgrades continued to be driven by companies from the investment-linked sectors. The impact of demonetization on credit quality is expected to be transient.
CRISIL expects upgrades to outnumber downgrades in the near term driven by improving domestic consumption demand. Additionally, several sectors such as metals (especially non-ferrous), and sugar are expected to see improvement in credit quality in fiscal 2018 because of rising prices.
Says Somasekhar Vemuri, Senior Director, CRISIL Ratings: “While these improving trends will lead to lower slippages to NPAs in the banking sector in fiscal 2018, the underpinnings still remains fragile. We expect the stock of GNPAs to continue rising and remain at elevated levels. Further, recoveries would stay subdued given that sizeable NPAs are in highly leveraged companies with stretched cash flows.”
Several investment-linked sectors such as real estate and capital goods continue to see headwinds. Microfinance institutions (MFIs) are also seeing a build-up of stress. Also, many major corporate houses with high indebtedness would remain stressed in the near-term.
While CRISIL expects credit quality to improve in fiscal 2018, the pace of improvement hinges on balance sheet deleveraging through asset sales, another spell of normal monsoon, no further slowdown in India’s major trade destinations, pick-up in investment cycle, effective implementation of reforms (especially GST), the ability of MSMEs to withstand increasing formalisation, and the absence of any sharp swings in the rupee versus the dollar.
CRISIL remains focussed on the quality of its ratings and strives to minimise sudden and sharp rating actions (upgrades as well as downgrades).Investors expect high degree of stability, especially in the higher rating categories (‘A’ and above). CRISIL’s portfolio witnessed 1722 rating actions in the ‘A’ and above categories during 2016-17, out of a portfolio of 1,074 in these rating categories. Only 93 of these were multi-notch changes.