India Ratings and Research (Ind-Ra) believes the credit profiles of corporates are likely to remain under pressure as the economy grapples with a synchronised and prolonged economic slowdown. In its base case, at least INR10.52 trillion of the corporate debt (16% of system level corporate debt) is vulnerable to default over the next three years. Empirically, about 25% of the vulnerable debt is likely to turn delinquent – resulting in additional INR2.54 trillion of delinquent debt. This is likely to result in incremental delinquencies to the extent of 4% of the system level corporate debt.

However, in case the real gross domestic product growth slowdown intensifies (4.5% over FY21-FY22), incremental delinquencies could be higher by an additional 159bp to 5.59% of the system debt. Alternately, in case of a sharp recovery in gross domestic product (growth to 7% over FY21-FY22, delinquencies could be lower by 87bp to 3.13% of the system debt. 

Ind-Ra has analysed in detail the degree of vulnerability of the top 500 debt heavy private sector issuers after assessing the mix between productive and non-productive assets (i.e., asset quality) held by each issuer along with their refinancing risk. The report buckets issuers in five categories of vulnerability – low, moderate, high, extreme and stressed. Based on these buckets, the agency has arrived at the estimates of debt at risk and expected credit costs. 




INR1.37 trillion in Credit Costs by FY22: Ind-Ra’s report details the base, bull and bear case estimates for system-wide credit costs based on the historical default rates and loss given default for each vulnerability bucket. In particular, credit costs on the corporate book are likely to amount to 2.15% of the system debt in the base case. 


Furthermore, of the companies which are already stressed (i.e., recognised as defaulters by banks and credit rating agencies), lenders to at least half of these companies are likely to be required to take deep haircuts, given the inherently weak asset quality of these issuers. However, the majority of the exposure to these accounts has already been provided for by the lenders.

 

Sector-Wise Vulnerability Mix: Ind-Ra’s report identifies the quantum of vulnerable debt by analysing the refinancing risk and asset quality for 11 sectors and places each sector in its vulnerability matrix. The report further discusses the various components of refinancing risk – business risk, liquidity and financial flexibility of the players in each sector. 

Moreover, Annexure A of the report provides the distribution of debt by refinancing risk, asset quality and vulnerability for each sector, while Annexure C provides ranks each sector’s business risk profile based on the five-year cash flow volatility. 

Predictive Ability of this Analysis:
Ind-Ra in January 2017 published the second edition of its asset funding study of the top 500 corporate borrowers. Basis the current methodology of classifications, 48 issuers would have been classified as ‘Extremely Vulnerable’ while 70 would have been classified as ‘Highly Vulnerable’. 66.67% of the entities in the Extremely Vulnerable bucket have defaulted since then while the number stands at 42.86% for the High Vulnerability bucket. Even beyond the number of defaults, Ind-Ra’s look-back analysis indicates that asset quality by itself has a larger impact on the default probability of the issuers than its refinancing risk. Issuers even in the Elevated Risk of Refinancing bucket – with healthy asset quality – have a track record of refinancing their debt maturities, albeit at a cost.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Analyst Names

  • Arindam Som

    Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40356183

    Rakesh Valecha

    Senior Director - Core Analytical Group
    +91 22 40001740

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121