Coronavirus outbreak, recession cloud credit quality outlook, says CRISIL

The intensifying impact of Covid-19, coupled with a looming global recession, has cast an unprecedented shadow over the credit quality outlook of India Inc, which was already struggling due to the economic slowdown, said CRISIL.

The impact of a slowing economy has started reflecting in rating actions with downgrades (469) outnumbering upgrades (360) in H2FY20. CRISIL’s credit ratio slid to 0.77 in H2, compared to 1.21 in H1FY20.

However, timely measures by the Reserve Bank of India (RBI) — to permit banks to offer moratorium on servicing of loans until May 2020 — comes as a huge breather.

Over the near-to-medium term, however, the credit quality trend will be driven by the ability of companies to rebound from the near-stagnation in demand.

Gurpreet Chhatwal, president of CRISIL Ratings, said: “India Inc’s credit quality will deteriorate in the near term. Its study of 35 sectors — both from manufacturing and services — however, shows sharp variation in resilience in a post-Covid landscape.

Strong balance sheets or continuing demand will support some sectors.”

These 35 sectors account for 71 per cent of debt (excluding financial sector) in CRISIL’s rated portfolio. Around 4 per cent of debt is in sectors that are least resilient, such as airlines, gems and jewellery, auto dealers, and real estate, given the discretionary nature of goods and services, and weak balance sheet.

Nearly 44 per cent of debt is in sectors expected to be in the high-resilience category. Among these, pharmaceuticals, fertiliser, oil refineries, power & gas (distribution and transmission) benefit from the essential nature of products and, in some cases, from government support.

chartNearly 52 per cent of debt is in sectors expected to be moderately resilient, such as auto manufacturers, power generators, roads, and construction.

In a similar development, Moody’s downgraded the outlook on the Indian banking system from “stable” to “negative” on Thursday. This follows the adverse fallout of the virus outbreak, coupled with a rise in defaults.

Banks’ asset quality is expected to deteriorate across the corporate, SME and retail segments, leading to pressure on profitability and capital, Moody’s said a statement.