Pressures are also reflected in the increase in banks’ gross non-performing assets (NPAs; to 2.9 per cent of advances from 2.3 per cent), and in the quantum of debt restructured (to 3.3 per cent of advances from 2.5 per cent) between March 31 and December 31 of 2011 and upgraded 266 ratings.

This marked a reversal in trend from the first half of 2011-12 when CRISIL upgraded 313 ratings, which was higher than the 207 downgrades. The downgrades were driven by liquidity pressures and weakening demand. Significantly, one-third of the downgrades were to the default category (‘CRISIL D’).

“Weak liquidity caused by elongation of working capital cycles is the primary reason for the defaults. This trend is likely to persist with slowing demand” says Ms. Roopa Kudva, Managing Director and Chief Executive officer CRISIl.

Highly indebted industries, including textiles, steel, construction and engineering, accounted for a fourth of the defaults. Textile exports have been hampered by weak demand, especially in the Eurozone.

CRISIL expects RAR to decline further to less than 1 time over the near term. Higher rated (‘CRISIL AAA’ and ‘CRISIL AA’) companies have stronger balance sheets, and are, therefore, better positioned to withstand slackened demand.

The extent of demand slowdown, access to funding, and degree of recovery in the global economy will delay monitorables over the medium term.

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