Credit sourcing: Weakly rated firms under pressure, says Ind-Ra

Ind-Ra said excess system liquidity has become necessary to absorb the short-term financing challenges without stoking an irrational credit culture in the near term.

Prevailing tight financial conditions could intensify impact of ongoing credit events, says India Ratings

With the rising risk aversion in the market, sourcing credit for issuers which are rated below ‘A’ category — rated in ‘BBB’ category and below or have no rating outstanding — is increasingly becoming difficult, posing risks for the system’s financial stability, India Ratings (Ind-Ra) has said. Ind-Ra’s recent analysis of the top 500 corporate borrowers which comprise about 78 per cent (Rs 43,60,000 crore as of FY17) of the overall banking system’s corporate exposure indicates that around Rs 7,60,000 crore debt is on the books of the non-public sector entities rated in ‘BBB’ category and below or have no rating outstanding.

It said the prevailing tight financial conditions could intensify the impact of ongoing credit events unless liquidity of financing channels is at least partially reinvigorated. “The adverse conditions in the interest rate market, increasing risk aversion by public sector banks (PSBs), volatile external environment and limited access to alternative financing options as critical drivers for corporate credit quality in FY19, especially for weak entities (rated BBB+ and below). Collectively and concurrently, these could pose risks for the system’s financial stability,” it said.

Consequently, Ind-Ra estimates that in the absence of favourable liquidity/market conditions, refinance pressure (working capital renewals and replenishing run down of existing debt) could impact Rs 3,00,000-4,00,000 crore exposures (Vulnerable Set) of the sample set. “These would remain reliant on banks for refinancing, given that in most of these cases, free cash flows would be inadequate for debt repayments,” it said.

Story continues below this ad

The rating agency expects the Indian government’s substantial infusion of Rs 1,53,000 crore (FY18: Rs 88,000 crore; balance expected in FY19) to be adequate to cover credit costs emanating from stressed assets. “Barring three-four healthy PSU banks, the FY20 CET1 may be below the current regulatory requirements. This could increase banks’ risk aversion and could skew incremental lending towards better rated corporates, leaving lesser space for small and weaker credits,” it said.

It opines in the absence of PSU banks, private sector banks and non-banking finance companies (NBFCs) could fill the gap with higher market penetration subject to their risk appetite. “However, 50-60 per cent of ‘AA’ category NBFCs’ liabilities are sourced from banks, and this goes up for those rated in lower categories. Also, some banks could approach sectoral limits on exposure towards NBFCs. Consequently, NBFCs would capitalise on these opportunities and fill the credit gap to a moderate extent,” it said.

The dependence on market-based financing is not free from headwinds, given the inadequate depth and skewed preference for investments. Also, given a sectoral cap for mutual fund investments, crowding out by large borrowers would reduce investor appetite for funding medium to small borrowers, it said.

“The domestic financing market could be impacted by rising externalities: elevated global yields and pressure on the Indian currency, impact on input costs and abrupt outflow of funds from the country and volatility in the currency markets,” it said.

Story continues below this ad

Ind-Ra said excess system liquidity has become necessary to absorb the short-term financing challenges without stoking an irrational credit culture in the near term.