India Inc's credit profile in the first half of the financial year 2019/20 was the weakest since 2015/16 and the outlook continues to be cautious due to the ongoing economic slowdown and dwindling consumption expenditure, ratings agency CRISIL said today.
The value of debt downgraded during the first half of 2019/20 more than trebled to Rs 1.38 lakh crore from Rs 39,000 crore in the first half of 2018/19. That's the highest for any half since fiscal 2016.
"Across rating categories, entities with higher leverage saw more downgrades as pressure from the demand slump intensified. Declining profitability and stretch in working capital cycles also were reasons for the downgrades. On the other hand, those with lower leverage withstood the demand-side challenges better," Somasekhar Vemuri, Senior Director, CRISIL Ratings, said during a teleconference today.
Across rating categories, entities with higher leverage saw more downgrades as pressure from the demand slump intensified. Declining profitability and stretch in working capital cycles also were reasons for the downgrades. On the other hand, those with lower leverage withstood the demand-side challenges better.
The fall in credit ratios was across investment: export, domestic and consumption-linked sectors. Construction and allied sectors accounted for over 30 per cent of the downgrades among investment-linked sectors because of delays in project execution and stretched liquidity.
Among consumption-linked sectors, auto components and other auto-related sectors accounted for nearly 15 per cent of the downgrades. However, the credit profiles of automobile manufacturers remain cushioned by strong balance sheets.
In the financial sector, a year since the funding squeeze began for non-banks, challenges persist for those with wholesale-oriented loan books. While measures announced by the government and the Reserve Bank of India to improve flow of credit to the sector and sharper focus of non-banks on their asset-liability maturity profiles are welcome, access and cost of funding will remain the key monitorables, CRISIL said in its half-yearly report.
For banks, non-performing assets are expected to continue to decline from the 9.3 per cent estimated at the end of fiscal 2019, because of fewer fresh slippages and faster recoveries after the recent changes to the Insolvency and Bankruptcy Code. Infusion of capital, especially for public sector banks, and emphasis on retail credit book expansion, should drive growth.
The moderation in CRISIL's credit ratio can be viewed in line with macroeconomic trends. Macroeconomic indicators such as gross domestic product (GDP) and Index of Industrial Production (IIP) decelerated sharply since the fourth quarter of fiscal 2019.
A plunge in domestic private consumption demand, slump in manufacturing, halving of merchandise exports growth and a high-base effect from last year gnawed away at first-quarter growth. In line with these trends, CRISIL's credit ratio moderation was also an across-the-board phenomenon various sectors.
The rating agency maintained a cautious outlook for the second half of the year due anaemic domestic consumption, slowing global growth, slackening of government spending and investor risk aversion.
"We remain cautious about the credit outlook for the second half because demand pressures persist. Going forward, how well demand recovers after a good monsoon, the sharp cut in corporation tax, faster and automated release of Goods and Services Tax refunds, and higher export incentives will be the key monitorables," Gurpreet Chhatwal, President, CRISIL Ratings, said.
The credit outlook continues to be cautious on account of demand pressures stemming from the ongoing economic slowdown, slowdown in consumption spending, lower pace of government spending on infrastructure projects and constrained funding access for some sectors.