Credit quality of large enterprises fall to 7-year low in FY20; here’s what led to the decline

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Published: April 4, 2020 4:02:54 PM

Indian corporates have been pressured by the slowdown in the domestic economy and tight financing conditions in the domestic economy.

77 per cent business saw their ratings “being reaffirmed in 2019-20,” (Representative image)

The weakness of credit profile of large enterprises has led to the decline in their credit quality to 7-year low in FY20, rating agency CARE Ratings said in its assessment of credit quality of rated agencies in FY20. “The credit quality of the rated entities as measured by CARE Rating’s ‘modified credit ratio’ (MCR) declined to a 7 year low in 2019-20,” the agency said. Indian corporates have been pressured by the slowdown in the domestic economy and tight financing conditions in the domestic economy, it added.

In FY13, the MCR (the ratio of upgrades and reaffirmations to downgrades and reaffirmations and an increase in it implying improving credit quality of rated businesses) stood at 0.81. This increased to 1.03 in FY14, peaked to 1.17 in FY15 before it started declining to 1.09 in FY18, 1.04 in FY19 and 0.96 in FY20 reflecting the higher number of rating downgrades.

While the credit quality of companies with ‘investment grade’ rating in FY20 was seen as “fairly stable with a higher number of reaffirmation of ratings,” those with ‘below investment grade’ ratings are facing weakening in their credit qualities in FY20 from a year ago. The downgrade in the ratings in FY20 was large because of the fall in “scale of operations, deterioration in asset quality, delays in debt servicing and weakened – capital structure, debt service coverage ratios and liquidity position,” the agency said.

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However, 77 per cent business saw their ratings “being reaffirmed in 2019-20,’ it added. This reaffirmation and upgrade of ratings of businesses have been influenced by the entities having a favourable financial position in terms of profitability, growth in scale of operations, comfortable debt servicing parameters, liquidity position and capital structure. The fall in the credit quality of large enterprises was higher than in small businesses. The MCR for the large enterprises in FY20 at 0.94 was 9 basis points lower than year-ago at 1.02. On the other hand, for SMEs, the MCR at 1.03 was 6 basis points lower than a year ago.

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