The credit ratio for the first half of the current financial year at 0.9 time, which is similar to the ratio in the second half of the previous fiscal at 1.0 time), suggests that any meaningful improvement in the credit quality of Indian entities is yet to come, ICRA said on Monday.
In H1FY2017, ICRA upgraded ratings of 287 entities and downgraded ratings of 314 entities, compared with 338 upgrades and 327 downgrades in H2FY2016. The fall in number of upgrades – a trend since H2FY15, was largely due to rise in stress in sectors such as metals, engineering, gems & jewellery and textiles, the ratings agency said.
“Also, further strengthening in the credit quality of entities in sectors like pharmaceuticals and information technology is not imminent, because of increasing regulatory intervention and slowing client spending overseas, respectively. This also restricted the volume of upgrades”, said Anjan Ghosh, chief rating officer, ICRA.
Credit profiles of public sector banks (PSBs), which have been plagued with asset quality issues, may become further affected if some of them fail to step up common equity to meet the capital conservation buffer that is required to go up from 0.625% in March 2016 to 2.5% by March 2019. A significant breach on this buffer may lead to ratings on additional tier-1 capital instruments getting tested, the agency said. While the government has made policy changes in investment-heavy sectors in the last couple of years to resolve structural issues plaguing the sectors, meaningful improvement in the credit quality would depend on the ability of individual institutions implementing these measures.
However, growth in consumption-driven sectors may bring some relief, especially as payouts from the 7th Pay Commission push up disposable incomes.