India Ratings and Research (Ind-Ra) in one of its note said, “The impact of coronavirus (COVID-19) pandemic and the associated policy response is likely to result in an additional Rs1.67 trillion of debt from the top-500 debt-heavy private sector borrowers turning delinquent between FY20-21-FY21-22. This is over and above the Rs2.54 trillion anticipated prior to the onset of a pandemic, taking the cumulative quantum to Rs4.21 trillion”.
And added, “This constitutes 6.63% of the total debt, given that 11.57% of the outstanding debt is already stressed, the proportion of stressed debt is likely to increase to 18.21% of the outstanding quantum. We expect the corresponding credit cost to be 3.57% of the total debt.”
According to Ind-Ra, it has meticulously analyzed the degree of vulnerability of the top-500 debt-heavy private sector issuers, after assessing the mix between productive and non-productive assets or asset quality that each issuer holds along with their refinancing risks. The report classifies issuers in five categories of vulnerability – low, moderate, high, extreme and stressed. Based on this classification, the agency made an estimation of debt at risk and expected credit costs.
Ind-Ra commented that it reckons that in a scenario wherein funding markets continue to exhibit heightened risk aversion, corporate stress could increase further by Rs1.68 trillion, resulting in Rs5.89 trillion of the corporate debt or about 9.27% of the total debt becoming stressed in FY20-21-FY21-22. The resultant credit cost could be higher at 4.82% of the outstanding book. Consequently, 20.84% of the outstanding debt could be under stress in the agency’s stress case scenario.
In case, there is a risk of a significantly prolonged recovery in the economic activity through FY20 to FY22 and more than an expected slump in demand then stresses could even surpass the agency’s stress-case estimates. It says, “The progression of the pandemic, the policy response and its impact on economic growth, the actual build-up of stress could result in higher default rates and credit costs – in line with the peak levels experienced in the last decade.”
The rating agency has forecasted credit growth to go down by 15% and refinancing requirements to remain high over FY20-21. It added, “The tepid corporate CAPEX coupled with muted revenue is likely to restrict credit growth in FY20-21. However, refinancing pressures will persist and securing timely funding could continue to prove challenging”.
It forecasted, “Rs4.81 trillion fresh credit demand by the top-500 debt-heavy private sector corporates to emanate from a mix of receivable financing and a further drawdown of unutilised bank limits to shore up liquidity, meet cash flow shortfalls and to fund various isolated pockets of Capex spending – largely restricted to maintenance CAPEX”.
It further said, “An additional downside risk emanates from the fact that the impact beyond the top-500 debt-heavy private sector corporates could be more severe depending on the access to liquidity, and could even be disproportionately higher”.
And added, “In particular, as economic uncertainties continue to linger, lenders despite adequate liquidity are most likely to deploy their capital at the upper end of the credit curve with a shorter tenure. Lenders may turn even more selective – weakening the resource mobilisation ability of lower-rated issuers in the investment grade, including those rated in the ‘A’ and ‘BBB’ categories. Consequently, these issuers are at the greatest risk of facing rating transitions in FY20-21, although the rating sensitivities for various higher-rated corporates could also be tested”.