• Micro And Small Enterprises
  • Micro, Small and Medium Enterprises
  • Economic Growth
  • CRISIL Ratings
  • Reserve Bank of India
  • MSME
August 26, 2021 location Mumbai

Few takers for restructuring 2.0 amid demand recovery

95% of companies going for it are in the sub-investment grade rating category

Barely 1% of eligible companies1 in the portfolio of CRISIL Ratings have opted for, or are contemplating, the debt restructuring facility offered by the Reserve Bank of India (RBI) under its Resolution Framework 2.0, a CRISIL Ratings survey of ~4,700 companies it rates shows. As much as 95% of those opting for, or are inclined to seek restructuring, belong to the sub-investment grade rating category. Put another way, investment-grade rated corporates are showing high resilience.

 

These are preliminary readings from the survey, and may not be reflective of the inclination among those not rated by CRISIL Ratings. In particular, most of the micro and small enterprises in India are unrated.

 

The RBI announced the scheme on May 5, 2021, for borrowers, including individuals, small businesses, and micro, small and medium enterprises (MSMEs) with aggregate exposure of up to Rs 25 crore provided they had not availed of benefits under any of the earlier restructuring frameworks (including Resolution Framework 1.0 dated August 6, 2020), and were classified as standard accounts as on March 31, 2021. On June 4, 2021, the RBI raised the aggregate debt threshold to Rs 50 crore from Rs 25 crore.

 

This increase in threshold led to about two-thirds of the CRISIL-rated mid-sized companies2 becoming eligible for the restructuring 2.0 scheme3. The fact that only a handful of companies are exploring the restructuring option could be reflective of a relatively improved business outlook accompanying a pick-up in economic activity in the aftermath of the pandemic's second wave.

 

Says Subodh Rai, Chief Ratings Officer, CRISIL Ratings, "The quick recovery in demand after moderation during the second Covid-19 wave, and sanguinity around economic growth have led corporates to give the restructuring option a miss. The more localised and less stringent nature of curbs/restrictions during the second wave has meant relatively lower disruption in business activities compared with the first wave. So the muted response is par for the course."

 

CRISIL Ratings' investment grade rated corporates have shown strong resilience amid the pandemic and hardly anyone is planning to avail restructuring 2.0. In fact, 95% of companies which have opted or showing inclination for restructuring 2.0 are rated in sub-investment grade rating category. Within these, four out of five are rated in the B or lower rating categories, clearly indicating that only companies with weak credit quality are exploring restructuring.

 

Says Nitin Kansal, Director, CRISIL Ratings, "Most of the companies that have opted for, or are contemplating, restructuring 2.0 belong to the low-to-medium resilience4 sectors such as hospitality, educational services, textiles, construction and gems and jewellery. Demand recovery in some of these remains uncertain because of the continuing overhang of the pandemic."

 

Any weakening of sentiment around recovery, and a likely third wave leading to fresh curbs on economic activity, will influence more companies to seek restructuring 2.0. This could be especially true for the smaller ones that typically experience more stress. Greater clarity will emerge closer to the September 30, 2021, deadline set by the RBI for invoking restructuring plans. CRISIL Ratings will continue to monitor this space closely.

 

1 Companies having bank loan exposure of up to Rs 50 crore and are standard accounts as on March 31, 2021
2 Mid-sized companies – having aggregate bank loan exposure of less than Rs 500 crore
3 https://www.crisil.com/en/home/newsroom/press-releases/2021/06/two-thirds-of-crisil-rated-mid-sized-companies-now-eligible-for-restructuring-2-point-0.html
4 Sectoral resilience measures ability to withstand future disruptions/shocks. It is based on category of goods (essential/ non-essential); nature of demand (discretionary or non-discretionary); balance sheet strength in terms of leverage and liquidity available for entities in the sector; and the level of government/ regulatory support to the sector. (For further details, please refer to CRISIL Ratings' report titled 'Guarded optimism amid pandemic resurgence', dated April 2, 2021)

Questions?

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    Saman Khan
    Media Relations
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  • Analytical contacts

    Subodh Rai
    President and Chief Ratings Officer
    CRISIL Ratings Limited
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    subodh.rai@crisil.com



  • Nitin Kansal
    Director
    CRISIL Ratings Limited
    D: +91 124 672 2154
    nitin.kansal@crisil.com