Crisil Ratings saw its credit ratio¹ increase further in the first half of fiscal 2022, with 488 upgrades and 165 downgrades, reflecting a sharp and sustained recovery in demand despite the intense second wave of Covid-19 infections.

This was the second consecutive rise in the credit ratio, at 2.96 times. It had risen to 1.33 times in the second half of last fiscal from 0.54 time in the previous half.

The outlook for India Inc’s credit quality remains ‘positive’².

Says Gurpreet Chhatwal, Managing Director, Crisil Ratings, “A sustained recovery in domestic demand, government impetus to infrastructure spending, and export growth, spurred by a buoyant global economy as well as the ‘China plus one’ sourcing strategy of global players, have led to a strong rebound in business risk profiles of India Inc, thereby driving the increase in upgrades.”

Among manufacturing sectors, steelmakers benefitted from a combination of strong global demand and production cutbacks in China owing to environmental concerns, leading to high realizations. Pharmaceuticals and specialty chemicals also sustained their strong performance trajectory, backed by global demand. Agro commodities, such as sugar and edible oil, also benefitted from steady domestic demand growth. In the automobile sector, especially two wheelers, the recovery is delayed beyond fiscal 2022 due to sluggish rural demand, though balance sheets remained strong indicating unscathed credit profiles.

Infrastructure-linked sectors, such as roads, renewable energy, and construction and engineering, continue to benefit from government spending and correspondingly strong order books, as well as the improving pace of execution.“

The services sector, too, is finally turning the corner after a debilitating fiscal 2021. Its credit ratio rose to above 1 time for the first time since the onset of pandemic, on the back of select sectors,” adds Chhatwal.

To be sure, services continue to lag the manufacturing and infrastructure-linked sectors in demand recovery, and correspondingly, still have a much lower credit ratio. Travel and hospitality, and education services are among sectors still seeing tepid recovery. Health care, among the contact-intensive service sectors, and information technology, among other services sectors, actually benefitted amid the pandemic as they successfully addressed challenges pertaining to health, remote working and information security that emerged during the pandemic.

India Inc also continued the trend of deleveraging (see annexure) for the sixth straight year in the previous fiscal, uninterrupted by cash-flow disruptions and emergency funding requirements caused by the pandemic. A strong run of primary issuances in equity markets also supported the balance sheet strengthening.

Improving financial profiles provide a cushion for future shocks, including a potential third wave, as well as for re-leveraging, when the private capex cycle resumes over the medium term.

With India Inc on stronger footing, the financial sector is better placed today than it was a year ago — the systems and processes put in place for collections after the first wave have helped this time around, coupled with the less-stringent containment measures. Improving capitalization levels and provisioning coverage ratios have strengthened the banks’ balance sheets. The outlook on credit quality for financial sector, especially banks, is stable.

That said, challenges persist in the retail and micro, small and medium enterprises loan segments as smaller borrowers have seen outsized impact of the pandemic. Banks’ non-performing assets are expected to increase to 8-9% by March 2022 from ~7.5% in March 2021.

Banks’ credit growth is expected to recover to 9-10% this fiscal from 5% in the previous one. Similarly, assets under management of non-banking financial companies (non-banks) are also expected to see a 6-8% growth compared with 2% in the previous fiscal. Non-banks’ credit profiles are cushioned by improving capitalization and liquidity buffers, even as asset quality will be a monitorable.

Says Somasekhar Vemuri, Senior Director, Crisil Ratings, “A potential third wave is the key near-term risk to our ‘positive’ credit quality outlook. A significant deceleration in economic and demand growth — both global and domestic — most likely due to withdrawal or sharp tapering of monetary and fiscal stimuli, will be the key downside risk over the medium term.”

An increase in the pace of inoculation – with nearly 70% of the adult Indian population having received at least one dose already – and expectations that containment measures in the event of a third wave will be less stringent and localized, should contain demand disruption.

Emergence of any virus mutation that dilutes the benefits of vaccination, and any change in the growth-supportive policies of governments and regulators will be key monitorables, along with an increase in commodity prices and freight costs, and their impact on profitability.

¹ Refers to the ratio of upgrades to downgrades. Excludes rating actions involving ratings with the Issue-not-cooperating (INC) suffix
² See ‘India Inc credit outlook turns positive, upgrades rise’ - Crisil Ratings Press Release dated August 18, 2021