Credit quality pressures on corporates bottoming out: CRISIL

Credit quality pressures on corporates bottoming out: CRISIL
Corporate India's credit quality is on course for recovery, albeit gradually, in 2014-15. CRISIL believes the credit ratio - the ratio of rating upgrades to downgrades - may recover from the low levels seen last fiscal as pressure on profitability and demand eases.

Nevertheless, the overall credit quality will be far from buoyant in the near term, given the fragile economic growth and limited scope for reduction in interest rates, said CRISIL.

The credit ratio, at 0.79 times in 2013-14, has remained weak for two years now as downgrades outnumbered upgrades on slowing demand, tight liquidity and high interest rates. However, moderation in downgrade intensity—to 10.1 per cent from 12.1 per cent in 2012-13—has helped the credit ratio recover marginally from 0.62 times in the previous fiscal. These rating actions were witnessed on a very large base of over 13,000 ratings, making them quite representative of the trends in corporate credit quality in India.

CRISIL downgraded ratings of 1,165 firms and upgraded those of 921 in the last fiscal. Around 90 per cent of the downgrades was on account of slowing demand, tight liquidity, and stretched working capital cycles. Companies in investment-linked sectors such as power, construction, engineering and capital goods, and transport had more downgrades than firms in other sectors.

More than a third of the upgrades was on account of company-specific factors such as sustained track record of timely debt servicing and stronger- than-expected capital structure. Another third of upgrades was driven by improved business conditions for firms in sectors—such as packaged foods, textiles and agricultural products—that have linkages with exports, agriculture, and non-discretionary consumer segments.

CRISIL believes that corporate credit quality will improve as GDP growth touches 6 per cent in 2014- 15 from sub-5 per cent levels seen in the last two fiscals. The credit ratio will, however, remain below 1 time in the near term.

Dion Global Solutions Ltd.

Story first published: Thursday, April 3, 2014, 9:20 [IST]
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