India Inc’s credit landscape remains a tale of two distinct loan books – the good one, which is improving, and the bad one, with sizeable stressed assets (~Rs 11.5 lakh crore, or ~14% of bank advances1 as on March 31, 2017) where resolution has begun.
Crisil’s credit ratio2 (or number of upgrades vs downgrades), which printed at 1.45 times in the second half of fiscal 2018, continues to reflect the improvement in the good loan-book, though it has moderated from the levels seen in the first half.
There were 1,4023 upgrades to 8393 downgrades in fiscal 2018.
Upgrades outnumbered downgrades in the good loan-book on the back of better financial indicators due to lower capital expenditure (capex) and record equity issuances. Continued headroom in capacity utilisation across sectors made corporates go slow on capex, even as India Inc raised a record amount of equity – Rs 1.75 lakh crore in the ten months ended January 31, 2018.
Crisil-rated companies have shown steady improvement in capital structure and debt protection metrics over the past four years. The median gearing of companies improved to 1.0 time in fiscal 2018 from 1.37 times in fiscal 2015, whereas median interest cover improved to 2.83 times from 2.29 times.
The debt-weighted4 credit ratio2 stood at 1.53 times in the second half of fiscal 2018. Credit quality of debt-intensive sectors such as metals (especially non-ferrous), mid-sized EPC (engineering, procurement and construction), and select capital goods improved on account of higher commodity prices and government’s focus on infrastructure spending.
As for the bad loan-book, Crisil expects resolution of stressed assets to provide much-needed respite from fiscal 2019 onwards, and the stock of gross non-performing assets (GNPAs) to peak.
While resolution of the large-ticket corporate NPAs already referred to the National Corporate Law Terminal (NCLT) – under the Insolvency and Bankruptcy Code (IBC) route – could result in a reduction in GNPAs, this may be offset by recognition of new NPAs stemming from recent revisions to the resolution framework for stressed assets by the Reserve Bank of India (RBI).
1 Most of these stressed assets were either not rated by Crisil or would have been downgraded to a ‘Default’ or ‘Crisil D’ rating in the past and have not seen any significant change in their credit quality since then
2 Both credit ratio and debt-weighted credit ratio do not factor in rating actions on non-cooperative issuers
3 Including the rating actions on non-cooperative clients, there were 1,467 upgrades and 1,975 downgrades in fiscal 2018
4 Quantum of debt outstanding on the books of the companies upgraded to downgraded (excludes financial sector players)