The increasing impact of the Covid-19 outbreak in India, including a lockdown that has seen economic activities come to halt, and the threat of a global recession will exert pressure on the credit quality of Indian companies, according to a report by CRISIL on Thursday. The ratings agency has also revised India’s base-case gross domestic product (GDP) growth forecast to 3.5% for FY21.

In the second half of FY20, CRISIL’s ratings action saw 469 downgrades, which outnumbered the number of upgrades (360). This has seen CRISIL’s credit ratio (number of upgrades to downgrades) slide to 0.77, versus 1.21 in the first half of FY20. This is for the first time since the second half of FY16 that the credit ratio had fallen to below 1, implying that the number of downgrades has outnumbered the number of upgrades. The outlook for FY21 is much the same with downgrades expected to outweigh upgrades.

“We foresee India Inc.’s credit quality deteriorating in the near term. Our study of 35 sectors, both from manufacturing and services, however, shows a sharp variation in resilience in a post-Covid-19 landscape,” says Gurpreet Chhatwal, president, CRISIL Ratings. “Strong balance sheets or continuing demand will support some sectors during the current lockdown. However, some other sectors could be hampered by collapsing discretionary demand or high leverage.”

These 35 sectors account for around 71% of the debt in CRISIL’s rated portfolio. In absolute terms that comes to around ₹23 lakh crore. CRISIL’s research shows that around 44% of this debt is in sectors that have high resilience to a downturn, such as pharmaceuticals, fertilisers, power and gas distribution and transmission. All these sectors qualify as essential services that will need to be consumed irrespective of the economic cycle; some of them may even get government support, the report said. Also, sectors like telecom and FMCG (fast-moving consumer goods) might even see some uptick in demand. As people stay indoors and work from home, mobile telephony and data services are expected to see a huge surge in demand. FMCG is also likely to see a rise in consumption since people will need to continue consuming essentials and are buying in bulk to avoid going out multiple times.

Another 52% of the debt is in sectors that are categorised as moderately resilient. This includes sectors such as automobile manufacturers, power generators, roads, and construction. While these sectors are facing disruption due to the lockdown, they might see faster demand recovery once normalcy returns. Also, companies in these sectors that have a strong balance sheet are likely to be less impacted. Another 4% of debt is in sectors that are least resilient and may see demand recovery with a long lag. This includes sectors that have been hit hard due to the global pandemic, such as aviation, gems and jewellery, and real estate.

The CRISIL report also assesses the impact on non-bank lenders and concludes that NBFCs (non-banking finance companies) might come under pressure when it comes to managing their liabilities since there is no moratorium on offer for the repayment of money raised through capital market instruments. On the other hand, collections will come under pressure. However, most of the non-banks in CRISIL’s ratings universe have a liquidity cover that is sufficient for the next two months.

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