Credit quality of corporates continued to remain weak in the first half of the current financial year with the domestic rating agency ICRA upgrading just 287 firms against downgrades of 314 companies out of the around 7,000 entities with loans.
This makes the ratio of upgrades to downgrades, or the credit ratio, at a weak 0.9, a against 1.94 a year ago, or 460 upgrades against 237 downgrades, suggesting improvement in credit quality is still some time away.
Over the past few quarters, the number of downgrades shot up following a rise in stress in sectors like metals, engineering, gems and jewellery and textiles, ICRA said in a note today, adding the volume of rating upgrades has been declining.
ICRA’s head of credit policy Jitin Makkar said, “the reduction in instances of upgrades, a trend that started in the second half of FY15, continued in the first half of FY17 as power, real estate and construction, metals and engineering sectors remained stressed.
He noted strengthening in credit quality of sectors like pharma and IT is not imminent in backdrop of increasing regulatory intervention and slowing client spending overseas.
But the agency said further upside risks to downgrades are limited.
“Further downside risks to the overall credit quality of corporate and financial sector entities appear limited as of now, given the various policy actions taken by the Government in various sectors, including power, roads and metals-sectors that account for the highest proportion of banks’ credit exposure,” ICRA Chief Operating Officer Anjan Ghosh said.
“Near-term prospects of consumption growth look promising and if sustained, should lead to an improvement in capacity utilisation and the resultant improvement credit profile. This shows private investment recovery will have to wait more,” he added.
Though policy actions in some of the most troubled sectors have helped resolve certain structural issues, any meaningful improvement in credit quality depends on the ability of institutional machinery to complement positive policy measures with diligent implementation.
Consumption-oriented sectors like auto, durables, FMCG and retail may gather steam in near-term, thanks to the 7th pay panel awards and OROP scheme (for defence personnel) coupled with the near-normal monsoons and hike in minimum support price for farm produce.
“Though high debt levels of large corporates have come down, yet continuing stress in some highly capital intensive sectors like power and steel remain the key areas of concern. On balance, the credit quality of corporate sector entities is unlikely to worsen further,” the rating outfit added.