Cautiously optimistic credit outlook for FY22: CRISIL

From a decadal low of 0.54 in the first half of FY21, demand recovery and the gross domestic product (GDP) returning to the positive zone in the third quarter have aided CRISIL Ratings’ credit ratio of upgrades to downgrades rise to 1.33 in the second half of FY21.

The rating agency highlighted that the second half of FY21 saw rating upgrades for 294 borrowers against downgrades for 221. Academically, a credit ratio of more than 1 indicates more rating upgrades than downgrades, indicating buoyancy in credit quality. CRISIL said that the debt-weighted credit ratio, too, increased to 1.26 from 0.52.

According to CRISIL, the latest Union Budget’s impetus to infrastructure development, steady farm performance and sustained rural demand, together with the roll-out of the Covid-19 vaccination, hold promise for continued improvement in the credit quality of India Inc. even as the spectre of a second wave of Covid-19 infections looms large. “We do see worry in terms of the Covid-19 cases, and some bit of potential lockdowns,” warned Gurpreet Chhatwal, managing director at CRISIL Ratings.

In a virtual conference, Chhatwal and his colleague Somasekhar Vemuri, senior director at CRISIL Ratings, highlighted that the second half of FY21 saw fewer downgrades across the spectrum despite the Reserve Bank of India’s (RBI) policy and regulatory measures coming to an end (such as the loan moratorium in August last year), and the relaxation of default recognition norms in December 2020. “These had provided temporary relief at the peak of the lockdown,” said Vemuri.

According to Subodh Rai, CRISIL Ratings’ chief ratings officer, the emergency credit line guarantee scheme (ECLGS) provided much-needed liquidity support to jump-start business activity in the second half of the fiscal. “But the biggest driver for the increase in credit ratio were the unlock measures, which released pent-up demand across sectors, kick-started the economy and got cash flow from operations flowing for India Inc.,” said Rai.

As far as sectoral performance goes, since April last year, CRISIL Ratings has been analysing 42 sectors of which 34—accounting for 89% of the rated debt under study—have seen demand recovery to pre–Covid-19 levels. While six sectors, that together account for 4% of CRISIL-rated debt, are highly sensitive to the Covid-19 resurgence, 20 sectors would be moderate sensitive.

According to CRISIL, high resilience sectors which have companies with healthy balance sheets saw demand recover to pre-pandemic levels, and cost-cutting measures helped boost profitability. And moderately resilient sectors, which are investment oriented, increased public spending and unlocking measures have helped a turnaround. Low resilience sectors, on the other hand, still have a long road to recovery, with leveraged corporate balance sheets being a constraint for them.

In the second half of FY21, moderately resilient sectors such as automotive components and packaging saw a sharp increase in credit ratio led by increased pace of upgrades, even as the credit ratio for the moderate resilient category was below 1. “Moderately resilient sectors surprised us,” Chhatwal said.

Highly resilient sectors such as pharmaceuticals and agrochemicals, backed by sustained demand, had performed well and maintained a credit ratio above 1 even during the worst phase of the pandemic. However, low resilience sectors such as hospitality and real estate developers continue to see more downgrades than upgrades, even as pace of downgrades slowed in the second half.

Airlines, airport operators, hospitality and retail, which have a long road to recovery, are part of the highly sensitive sectors. This category also includes gems and jewellery and automotive dealers that have so far benefitted from the release of pent-up demand.

The rebound in corporate credit quality has benefitted the financial sector, where regulatory support by way of ECLGS and targeted long term repo operations (TLTRO) kept reported gross non-performing assets in check, as testified by rising collection efficiencies in the latter half of the fiscal. Public sector banks (PSBs) benefitted from capital infusions in the past and also returned to black at a systemic level after five years.

Come FY22, bank credit growth is set to rise to 9%-10% following mid single-digit growth in FY21. Within the banking sector, the proposed privatisation of two PSBs is a key monitorable, apart from collection efficiency, and fund-raising ability—the latter especially for non-bank finance companies (NBFCs). In this fiscal, NBFCs could raise more capital from the banking system owing to the regulatory policies from the Reserve Bank of India, but as far as their FY22 credit off-take is concerned, CRISIL foresees the annual growth in the range of 5%-6%.

On non-performing assets (NPA), CRISIL said the banking system’s gross non-performing asset (GNPA) ratio had reduced by nearly 100 basis points—hundred basis points make a percentage points—to around 7% in the first nine months of FY21 due to the standstill on NPA recognition. But that is going to change now.

“The current asset quality cycle is likely to be different from what we saw a few years back,” said Vemuri. “Unlike defaults from larger borrowers in the previous cycle, this time the slippages could be from smaller borrowers who are more vulnerable,” he added. For NBFCs, CRISIL expects the stressed assets to have risen to ₹1.5 lakh crore-₹1.8 lakh crore at the end of FY21. Real estate financing, micro, small, and medium enterprises (MSMEs), unsecured loans, and vehicle loans are likely to have the major share of NBFCs’ stressed assets as of end-March 2021.

For FY22, the growth-oriented Union Budget, which provides for higher infrastructure spending and targeted incentives for domestic manufacturing, apart from an expected normal monsoon and the low base of FY21, shall drive GDP growth of 11% in FY22 and, in turn, improve the credit profiles of India Inc.

However, the Covid-19 pandemic is still not behind us. And that is pretty visible in the caution that Vemuri advises: “The sharp rise in Covid-19 cases since mid-February 2021 and the impact of any stringent containment measure on businesses are the key threats to the nascent demand recovery and could impact the credit quality outlook adversely.”