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Credit quality pressures ease; a meaningful improvement to take longer, says ICRA

Credit rating agency ICRA on Monday said that the credit quality of India Inc. continues to remain weak, although the trend in rating actions taken by ICRA in the past one year suggests that further credit quality pressures have eased.

In FY 2017, the proportion of rating reaffirmations by ICRA was at a multi-year high and the volume of the debt downgraded also decreased sharply in comparison with the previous year.

However, while incremental downgrade pressures have subsided, the prospects of a definitive improvement in credit quality are not reassuring as yet. The pace of improvement would only be gradual as businesses adjust to and recover from balance sheet stress, tracing the recovery in business growth and improvement in capacity utilization.

“The proportion of rating reaffirmations by ICRA has been gradually rising over the past five years and stood at 84 percent in FY 2017 (82 percent in FY 2016). This is the highest proportion in many years, and substantially higher than the low point of 77 percent in FY 2012, when the weakening credit profile of a large number of entities in the wake of a decelerating economy, slowing corporate earnings growth and elevated debt levels had triggered a spate of rating downgrades. Overall, however, there was no major shift in the credit quality of ICRA-rated entities in FY 2017 and the median rating continues to remain at ICRA,” said Chief Rating Officer ICRA, Anjan Ghosh.

In the just concluded fiscal, ICRA upgraded the ratings of 603 entities and downgraded the ratings of 517 entities, in relation to a total of around 7,000 entities whose ratings were outstanding at the beginning of the year. While the proportion of entities downgraded has broadly remained in the range of seven to eight percent for three consecutive years, the value of the debt downgraded has been reducing.

As for upgrades, the trend in both the number of entities upgraded and the value of the debt upgraded has been on a declining curve. These trends reflect the ongoing phase of stabilization in the credit quality of entities, having faced significant deterioration in recent years.

“There has been a significant reduction in the total value of the debt downgraded which dipped to Rs. 1.7 trillion in FY 2017 from Rs. 3.0 trillion in the previous fiscal. While ICRA projects the Gross NPAs of banks to increase to 9.9 percent to 10.3 percent by the end of FY 2018 (9.5 percent as on Dec 2016) with further upside risks because of possible slippages from large accounts under the “standstill clause” pertaining to the various schemes for resolution of stressed assets this is unlikely to result in a material increase in the value of the debt that may be prone to downgrades in FY 2018. This is because the existing credit ratings of the large and stressed borrowers, including those under the standstill clause, already reflect their stressed positions,” said Head Credit Policy ICRA, Jitin Makkar.

As the impact of demonetization wanes, entities in consumption-oriented sectors like automobiles, consumer durables, food and food products and FMCG should revert to their earlier growth trajectory. In any case, these sectors are expected to continue maintaining superior credit profiles than those in investment-oriented sectors such as capital goods, real estate, building materials, metals and telecom.

The power sector remains a mixed story while distribution entities have gained from implementation of the UDAY scheme and the resultant savings in interest cost, independent power producers continue to suffer on account of low plant load factors, slow pace of signing fuel supply agreements and power purchase agreements, besides lack of resolution on compensatory tariffs.

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