View from India: Recovery in credit quality sustained

The credit quality of ‘India Inc’ points to two distinct loan books, one good and the other bad. The good one indicates improvements over the past year and this is a sustainable one. The bad one is a result of sizeable stressed assets. However, the only salutary part in the latter is that the process of resolution and asset sales has been initiated. These are some of the snapshots presented at the CRISIL Ratings Media Teleconference held yesterday.

The credit ratio and the debt-weighted credit ratio would moderate from here and will track GDP (gross domestic product) growth. What remains to be seen is the manner in which firms both small and mid-sized ones, align themselves to the new Goods and Services Tax (GST) regime.

“CRISIL expects the corporate credit quality to continue recovering, driven by further improvement in balance sheets. Lower interest rates, stable operating cycles, firm commodity prices and a growing domestic consumption demand are other factors that are expected to support the recovery of corporate credit quality,” said Somasekhar Vemuri, senior director, CRISIL Ratings, speaking at the CRISIL Ratings Media Teleconference organised to present a roundup of the rating actions during H1 (half yearly) 2017-18 and the outlook for H2 2017-18. CRISIL Ratings is part of CRISIL Limited, which has pioneered the concept of credit rating in India in 1987.

The stressed assets in the banking sector are a challenge for the economy’s growth. CRISIL estimates stressed assets to be around Rs 11.5 lakh crore or approximately 14 per cent of total advances as of March 31 2017.

Here are the key takeaways. CRISIL’s credit ratio or number of upgrades to downgrades improved to 1.88 times in the first half of the current fiscal, compared with 1.22 times for fiscal 2017. A reading above 1 indicates upgrades outnumber downgrades. The debt-weighted credit ratio surged to 3.19 times, versus 0.88 times for fiscal 2017. There were 817 upgrades to 434 downgrades in the first half of fiscal 2018. Both credit ratio and debt-weighted credit ratio do not factor in rating actions on non-cooperative issuers.

“For the first time in the past five years, both these ratios are above one on a rolling 12-month basis,” said Pawan Agrawal, Chief Analytical Officer, CRISIL Ratings. The credit ratio stood at 1.59 times and the debt-weighted credit ratio at 1.94 times. This indicates that the trend of recovery in credit quality has sustained for a year now.

“The improvement has come about primarily because of better financial indicators as corporates kept away from Capital expenditure given the output gap or substantial headroom in capacity utilisation in many sectors. We expect this trend to continue till the demand firms up. Lower interest costs will provide further support,” felt Agrawal.

Other highlights follow. In the next year, the large entities in telecom businesses will further consolidate their position while smaller ones will wind round or get consolidated. Telecom businesses do not include those in the tower business, although their cash flows depend on the performance of the telecom companies.

As for the auto sector, it enjoys a smooth ride as the temporary disruption ahead of GST implementation subsides. The automotive component industry is poised for higher growth at 9-11 per cent in the fiscal year 2018, against an estimated 7-8 per cent in the fiscal year 2017. This will be driven by increased offtake by OEMs (original equipment manufacturers) particularly passenger vehicle (PV) makers, steady aftermarket demand and slight uptick in exports.

Investment-linked sectors like real estate and capital goods will continue to face headwinds. Nevertheless, in the next six months, consumption-led sectors will see a revival compared to last year. That’s because demonetisation in the second half of the last fiscal led to a decline in the domestic demand, especially in rural pockets. This is estimated to see an upsurge.

Overall, a near-normal monsoon, softer interest rates and payment of Pay Commission recommended arrears are seen driving the overall growth in the coming quarters.

By and large, it’s a mixed trend across verticals and their outlook depends on their adaptability to GST, India’s biggest tax reform that became operational on July 1 2017. This is expected to significantly impact the GDP.

The GDP growth can be negatively impacted by a number of factors like sharp changes in commodity prices. A slowdown in India’s major trade destinations and prolonged implementation glitches in GST are other deterrents. The inability of micro, small and medium enterprises (MSMEs) and the unorganised sector to adjust to the new business environment or to formalise as per GST regulations can pose a challenge to GDP growth as much as sharp swings in the rupee versus the dollar rate.

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