India Inc's Credit Quality Outlook Positive For FY24, Say Crisil And Icra

The outlook on the credit quality of Indian corporates will be positive for FY24 due to low leverage, domestic demand, healthier banks and uptick in capital expenditure, according to two agencies Crisil and Icra.

However, there is an undertone of caution, as the full impact of the interest rate hikes on domestic demand is yet to be seen and a higher-than-expected global slowdown could further impact exports.

Also, tightening of global monetary conditions and rupee depreciation could increase refinancing risk particularly for companies with sizeable maturing overseas debt, the agencies said.

Crisil's credit ratio (rating upgrades to downgrades) moderated to 2.19 in second half of FY23 (Mach 2023) as expected, amid global slowdown and high inflation. The ratio stood was at 5.52 times in first half of fiscal 2023 (September 2022). In all, there were 460 upgrades and 210 downgrades across sectors in the second half of FY23.

According to Gurpreet Chhatwal, Managing Director, Crisil Ratings, India Inc’s balance sheets have significantly strengthened and gearing levels continue to be at decadal lows. The median gearing of its rated portfolio is expected be about 0.45 times as at fiscal 2024-end. This, along with steadfast domestic demand and the government’s unwavering focus on infrastructure spending, has kept the upgrade rate elevated.

Rating agency Icra said credit quality continued its strong rebound in FY23. It sustained the positive momentum initiated in FY2022, post the pandemic’s adverse impact on businesses seen in the earlier year. Improving consumer sentiment and the relatively healthy state of the financial sector in India are likely to support economic activity in the near to medium term, said K Ravichandran, Chief Rating Officer, Icra.

External factors, most notably the geopolitical machinations and the attendant risks of supply chain disturbances, stubborn inflation, and volatile capital flows, could challenge the gains in credit quality.

Volatile commodity prices have impacted profitability, particularly of micro, small and medium enterprises (MSMEs), while export-oriented sectors face headwinds from slowdown in their major markets, Crisil said.

MSMEs, which benefited from policy interventions during the pandemic, will now have to contend with higher input costs and increasing interest rates, just as repayments on restructured loans begin.

About 60 per cent of the downgrades in the second half of fiscal 2023 were in the sub-investment grade category and largely consisted of MSMEs. As much as 70 per cent of the downgrades were due to a decline in profitability and/or liquidity pressure, Crisil added.