The credit ratios, or the proportion of upgrades to downgrades of corporates, fell in April-September from a year ago as some sectors witnessed a rise in downgrades, according to reports by various rating agencies.
For instance, the credit ratio of CareEdge Ratings fell to 1.67 in April-September from 3.74 a year ago. Similarly, the Crisil Ratings ratio moderated to 1.9 in April-September from 5.5 a year ago.
This implies that a year back, for every 3.74 upgrades (around 4), there was one downgrade. Now, that has fallen to every 1.67 (around 2) upgrade, there is one downgrade. That is, more companies are being downgraded for various reasons. A ratio of above 1 means more upgrades than downgrades.
“The upgrades were driven by an expected expansion in cash flows this fiscal for sectors linked to domestic demand and for those benefiting from high government spending. These sectors include infrastructure, services and consumables,” Crisil Ratings said in a report on Tuesday.
“The downgrade rate was seen inching up for export-oriented sectors as well, even as strong balance sheets somewhat cushioned the impact of heightened risks overseas,” according to the report.
Overall, the credit ratio was dragged lower by a higher downgrades in the first half of this financial years, especially among ‘investment grade companies’.
Deterioration in financial metrics and liquidity mismatches were the major reasons for rating downgrade actions.
“More than 25% downgrades are due to weakening in financial metrics, led by larger-than-expected support to group companies, and not due to operational performance-related factors,” India Ratings and Research said in a report.
“Further, liquidity challenges were not due to any systematic disruptions, and were largely from entity specific issues. Nearly half of such issuers were already on a negative directional indicator,” the report added.
A weaker-than-expected operating performance and pressure on profitability of some entities also led to downgrades.
Nevertheless, upgrades in the ‘investment grade’ category outnumbered downgrades, especially in sectors like auto, iron and steel, real estate, hospitality, healthcare, and logistics services. This ensured that the overall credit ratio remained stable, say analysts.
The credit ratio for the banking, financial services, and insurance(BFSI) sector improved to 4.20 in the first half of the current financial year from 1.9 in October-March, an assessment by CareEdge Ratings showed.
The ratio was helped by the fact that NBFCs expanded their operations in the first half as they achieved an improved profitability and bolstered capitalisation through fresh equity. Also, banks witnessed an improvement in credit ratios during this period, driven by higher net interest margins, a more favourable interest rate environment, enhanced asset quality, and stronger capitalisation metrics.
“With continued improvement in asset quality, public sector banks are narrowing the gap with their private sector counterparts, and the asset quality is expected to further improve in the coming quarters,” says CareEdge Ratings senior director Sanjay Agarwal.
Despite the challenges facing the global economy, the credit quality of India Inc has been resilient due to a sustained growth in domestic demand, deleveraged balance sheets, the China+1 strategy, and the government’s focus on infrastructure spending.
But, Icra’s chief rating officer K Ravichandran feels that the lagged effects of the domestic monetary tightening on borrowing costs, the spillover effects of the narrowing spread between the US Treasury and the G-Sec yields, and the prevailing weakness in external demand are key risks to the credit quality.