Credit quality of Indian companies worsened in FY20: ICRA

Domestic credit rating agency Icra said credit quality of Indian companies worsened in fiscal year 2019-20 as it downgraded Rs 7 lakh crore of debt and warned of "unprecedented strain" on credit profiles of corporates due to the coronavirus pandemic.

The agency said policymakers will have to unleash more measures to avoid “severe economic imbalances” if the COVID-19 crisis prolongs.

In its annual credit quality review after the end of the fiscal year, Icra said it downgraded Rs 7 lakh crore of debt in FY20, as against Rs 3 lakh crore in the year-ago period, driven largely by actions against financial sector companies.

However, this wasn't accompanied by an increase in the overall default rates which softened to 2.3 per cent in FY20 in comparison with the past five-year average of 3 per cent, it noted.

It downgraded debt of 584 entities in FY20, as against 282 upgrades, the agency said, adding the downgrade rate has moved to 16 per cent, while the upgrade rate has dipped to 8 per cent.

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Going ahead the economic outlook looks muted as the COVID-19 leaves an economic cost, it said.

India's GDP expansion rate is expected to plummet to decadal lows of 5 per cent for FY20 before the onset of the COVID-19 pandemic.

“The credit challenges that lie ahead because of the COVID-19 crisis are going to be exceptionally overwhelming and would likely put unprecedented strain on the credit profiles of a large number of entities across sectors," ICRA head of credit policy Jitin Makkar said.

The agency said credit quality of a large swathe of entities, across a wide range of sectors would worsen as a fall-out of the COVID-19 crisis, but the acuteness of the impact remains uncertain at this stage.

The impact will depend on how quickly the pandemic is contained and the measures taken by the government to soften the deleterious impact, it said.

ICRA chief rating officer Anjan Ghosh said, the duration of the lockdown, pace at which normal business activity resumes, quantum of government and regulatory support, and the dynamics of the individual sectors will determine the extent of the impact.

The agency has created a heat map of likely impact on sectors, as per which companies in aviation, hotels, cut and polished diamonds, retail and textiles (cotton spinning) and real estate sectors are most likely to face a downgrade.

Telecom, healthcare, roads, agri-products, FMCG and education might be less exposed to cash flow disruption, it said.

Acknowledging the interventions done by the RBI and the government to minimise the economic impact of the crisis, it said the moratoriums, systemic liquidity enhancement measures and large repo rate cuts should lend some support to market stability and offer protection against widespread defaults in the near term.

“The year FY21 thus portends to be a challenging year for credit quality of India Inc. as it might be for various other human, social and economic facets,” it said.