India Inc’s credit landscape remains a tale of two distinct loan books – the good one, which is improving, and the bad one, with sizeable stressed assets (~Rs 11.5 lakh crore, or ~14% of bank advances1 as on March 31, 2017) where resolution has begun.
CRISIL’s credit ratio2 (or number of upgrades vs downgrades), which printed at 1.45 times in the second half of fiscal 2018, continues to reflect the improvement in the good loan book, though it has moderated from the levels seen in the first half.
“Upgrades outnumbered downgrades in the good loan book on the back of better financial indicators due to lower capital expenditure (capex) and record equity issuances. Continued headroom in capacity utilisation across sectors made corporates go slow on capex, even as India Inc raised a record Rs 1.75 lakh crore of equity in the ten months ended January 31, 2018,” said Somasekhar Vemuri, Senior Director, CRISIL Ratings.
CRISIL-rated companies have shown steady improvement in capital structure and debt protection metrics over the past four years. The median gearing is estimated to have improved to 1.0 time at the end of fiscal 2018 from 1.37 times at the end of fiscal 2015. Median interest cover is estimated to have strengthened to 2.83 times versus 2.29 times.
The debt-weighted3 credit ratio2 stood at 1.53 times in the second half of fiscal 2018. The credit quality of several debt-intensive sectors such as metals (especially non-ferrous), mid-sized engineering, procurement and construction (EPC) players, and select capital good sectors improved because of higher commodity prices and the government’s focus on infrastructure spending.
As for the bad loan book, CRISIL expects resolutions to provide much-needed respite this fiscal onwards, and the stock of gross non-performing assets (GNPAs) to peak. While resolution of large-ticket corporate NPAs already referred to the National Company Law Tribunal (under the Insolvency & Bankruptcy Code route) could result in a reduction in GNPAs, this could be offset by recognition of new NPAs stemming from recent revisions in the resolution framework for stressed assets by the Reserve Bank of India (RBI).
Effective monitoring of credit quality as well as resolution of stress requires cooperation from borrowers. From 2017, the Securities and Exchange Board of India (SEBI) requires rating agencies to continue surveillance of ratings assigned to non-cooperative issuers on a best-effort basis.
The assessment of such non-cooperative issuers carry the risk of information inadequacy, which is factored into rating actions. Including rating actions on non-cooperative borrowers, the credit ratio for fiscal 2018 stood at 0.74 time, or considerably lower than 1.67 times for cooperative issuers.
Says Krishnan Sitaraman, Senior Director, CRISIL Ratings: “Fiscal 2019 can be a defining year for Indian banking, when focus returns to cranking up credit growth and steady operating profitability. Provisioning levels, though, will continue to be high, which would suppress overall profitability.”
Going forward, barring stressed assets, CRISIL expects corporate credit quality to continue recovering on the back of firming up of domestic consumption and global demand, stable operating cycles, and steady commodity prices.
Any aversion to lending among banks because of recent events, continued slowness in exports growth because of disruptions to global trade, prolonged working capital stretch due to Good and Services Tax (GST) issues, leverage levels in corporate balance sheets, and progress in resolution of stressed assets will remain the key monitorables.
1 Most of these stressed assets were either not rated by CRISIL or would have been downgraded to a ‘Default’ or ‘CRISIL D’ rating in the past and do not contribute to any rating action as their default status would not have changed.
2 Both credit ratio and debt weighted credit ratio do not factor in rating actions on non-cooperative issuers
3 Quantum of debt outstanding on the books of the companies upgraded to downgraded (excludes financial sector players)