Business disruption caused by COVID-19 has led to a weakening in the credit profile of a large number of entities resulting in a sharp increase in negative rating actions taken by ICRA.
In the first half of this fiscal (H1), ICRA took 582 negative rating actions which, on an annualised basis, accounted for 32% of its rated portfolio, compared with 23% in FY20. About half of the negative rating actions were downgrades. As downgrades rose, the annualised downgrade rate touched a high of 17% in H1 FY2021 compared with the past five-year average of 10%, it said.
Instances of upgrades were unsurprisingly sparse. ICRA upgraded the ratings of just 94 entities in H1 FY21, reflecting an annualised upgrade rate of 5%, compared with the past five-year average of 9%. In H1 FY21, the top five sectors (in terms of the count and the proportion of entities in the sector) that faced a negative rating action included textiles, real estate, hospitality, auto ancillaries and construction.
“All these sectors (barring hospitality) were already facing a demand slowdown prior to the onset of COVID-19 and the pandemic-induced disruption further amplified the adverse effects,” ICRA said.
“While negative rating actions in these sectors and the overall portfolio in general were high, there were lesser instances of defaults. Only 11 defaults were observed in ICRA’s rated universe in H1 FY2021 compared with 83 defaults seen in FY2020,” it added.
To a large extent, this is because many entities in ICRA’s rated portfolio (27%) availed a moratorium on payments on their bank loan facilities as permitted by the RBI alleviating default risk during the period of moratorium.
“While credit quality pressures have remained elevated, the situation could have been worse without the interventions seen on the fiscal, monetary and regulatory fronts,” said Jitin Makkar, head, credit policy, ICRA. “The mitigating effects of the measures manifested favourably in the broader financial markets as well as some specific sectors,” he added.