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India Inc. credit quality hits 10-year low; banks fear NPA spike

Credit downgrade means trouble for affected companies, whereas any stress in the corporate sector will be immediately reflected in the banking industry's delinquencies

twitter-logoAnand Adhikari | October 1, 2020 | Updated 19:15 IST
India Inc. credit quality hits 10-year low; banks fear NPA spike

The biggest credit rating agency in India, CRISIL Ltd, has witnessed a decadal high in downgrades in the corporate sector ratings during the first half of 2020-21, which has raised concerns for the banking industry.

The COVID pandemic has started taking a toll on the credit quality of the corporate sector. A rating downgrade means lesser sources for raising resources or paying a higher interest for debt. It also impacts the market valuation of a company.

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Any stress in the corporate sector will be immediately reflected in the banking industry's delinquencies. The banks had entered the COVID crisis with very high gross NPAs at 8-9 per cent of the total advances. The bankers are now worried as a huge amount of Rs 30 lakh crore loan was recently locked under the six month moratorium, which ended in August this year.

While the response towards loan restructuring is muted so far, there are a large number of stressed corporates from the pre-COVID period that have been denied the benefits of loan restructuring.

As per the RBI relief package, the restructuring is available to only standard accounts as on March 01, 2020. This leaves out a large number of stressed corporate for whom the downhill journey of rating downgrade and default started much before. Partly, the slowdown in the economy was to blame, but factors like sectoral weaknesses, over leverage and structural weaknesses in the governance also impacted the companies.

CRISIL's credit ratio of upgrades to downgrades for the first half was at 0.54, the lowest in more than a decade, with 296 downgrades and only 161 upgrades. A ratio of more than 1 indicates that there are more upgrades than downgrades.

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"Corporate credit profiles remain vulnerable even as demand claws back amid a raging COVID pandemic," said CRISIL. The rating agency's study also indicated that the second half outlook is negative.

The data of downgrades coming from CRISIL also concurs with the recent financial stability report of the Reserve Bank of India (RBI). The central bank report had estimated the gross NPAs to move from 8-9 per cent in 2019-20 to 12.5 per cent in 2030-21 in a base case scenario. But the NPAs could spike to almost double at 14.7 per cent in a worse case scenario.

While the restructuring and guarantees offered by the government and the RBI will postpone the larger problem for at least two years , the market will have to be ready for downgrades and defaults in the interim.

The Kamath committee, which was formed by the RBI for suggesting restructuring parameters, had estimated Rs 38.36 lakh crore of debt under stressed sectors. It said that Rs 16 lakh crore of fresh debt came under stress due to the coronavirus crisis, while Rs 22.20 lakh crore was loaned to the stressed sectors pre-COVID.

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