India Inc's debt quality hit new low in at least 7 yrs

The quality of India Inc's corporate debt has deteriorated to its lowest level in at least seven years, as the debt quality index continues to drop for the sixth consecutive month.

According to rating agency Care Ratings, which compiles quality index (DQI) on a monthly basis, the index dropped to 88.49 in the month of October, as the crisis in the Indian financial system doesn't seem to be nearing an end.

The decline in the quality of the debt has been primarily on the back of crisis in India's shadow banking sector -- with both non-banking financial corporations (NBFCs) and the housing finance companies (HFCs) witnessing a series of defaults and rating downgrades.

In August 2018, a month before liquidity crunch hit India's NBFCs, the debt quality stood at 91.37. The Indian markets were rocked by the default by the shadow banking giant IL&FS in September last year, which led to a terrible dearth of funds in India's financial system.

Marred by an asset-liability mismatch, many other shadow banks like Dewan Housing Finance (DHFL) have since defaulted. On the other hand, Indiabulls Housing Finance has been reeling under a liquidity crunch, forcing the company to sell off many of its subsidiaries.

The debt index had seen a marginal improvement in the months of December last year and February, March and April this year. However, since April the debt quality, according to the Index has been on the decline.

Prior to this, the highest level seen by the index was in April 2012 at 99.52. The lowest it had touched was in November 2017, when it was 88.8.

The dataset comprises of 1,602 companies from Care’s portfolio of 2,980 companies as of March 2012.

This is the sixth consecutive month when the debt quality in the country has witnessed a decline, according to the Index.

At the end of the September quarter, the total outstanding amount of India Inc in the debt market stood at a whopping Rs 30.8 lakh crore, while bank debt to industries and services sector stood at Rs 51.4 lakh crore. Of this, for the companies tracked by CARE in the index, the volume of debt of the sample companies stands at Rs 39.40 lakh crore in October 2019.

The index covers both corporate debt (debentures and bonds – excludes CPs and short term instruments) and bank facilities (fund-based and non–fund based – excludes short term instruments).

Many of the promoters of various blue-chip companies in India have been recently on a stake sale spree, in a bid to deleverage themselves.