The impact of COVID-19 and the associated policy response is likely to result in an additional Rs 1,67,000 crore of debt from the top 500 debt-heavy private sector borrowers turning delinquent between FY21 and FY22, a rating agency said. In the worst-case scenario, corporate stress could increase further by Rs 1.68 lakh crore.
“This is over and above the Rs 2,54,000 crore anticipated prior to the onset of pandemic, taking the cumulative quantum to Rs 421,000 crore,” India Ratings and Research (Ind-Ra) said in a report. This constitutes 6.63 per cent of the total debt (previous estimate: 4 per cent). Given that 11.57 per cent of the outstanding debt is already stressed, the proportion of stressed debt is likely to increase to 18.21 per cent of the outstanding quantum. The corresponding credit cost is expected to be 3.57 per cent of the total debt, Ind-Ra said.
The agency said in a scenario wherein funding markets continue to exhibit heightened risk aversion, corporate stress could increase further by Rs 1.68 lakh crore, resulting in Rs 5.89 lakh crore of the corporate debt (9.27 per cent of the total debt) becoming stressed in FY21-FY22. The resultant credit cost could be higher at 4.82 per cent of the outstanding book. Consequently, 20.84 per cent of the outstanding debt could be under stress in the agency’s stress case scenario, it said.
Although further revisions in the FY21 GDP growth expectations by itself may not lead to a change in stress estimates, the risk of a significantly prolonged recovery in the economic activity through FY22 and a larger-than-anticipated dent on demand could even result in stresses surpassing the agency’s stress-case estimates. The progression of the pandemic, the policy response and its impact on economic growth, the actual build-up of stress could result in higher default rates and credit costs — in line with the peak levels experienced in the last decade, it said.
Ind-Ra said the tepid corporate capex coupled with muted revenue is likely to restrict credit growth in FY21. However, refinancing pressures will persist and securing timely funding could continue to prove challenging.
“An additional downside risk emanates from the fact that the impact beyond the top 500 debt-heavy private sector corporates could be more severe depending on the access to liquidity, and could even be disproportionately higher,” the agency said. In particular, as economic uncertainties continue to linger, lenders despite adequate liquidity are most likely to deploy their capital at the upper end of the credit curve with a shorter tenure, it said. “Lenders may turn even more selective – weakening the resource mobilisation ability of lower rated issuers in the investment grade, including those rated in the ‘A’ and ‘BBB’ categories.
Consequently, these issuers are at the greatest risk of facing rating transitions in FY21, although the rating sensitivities for various higher rated corporates could also be tested,” Ind-Ra said.
Ind-Ra analysed 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 risks. The report buckets issuers in five categories of vulnerability – low, moderate, high, extreme and stressed.
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