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Debt paper downgrade of listed companies surges

MUMBAI: There has been a spike in downgrades and rating suspensions on debt papers of listed companies in the second half of fiscal 2019, indicating a deterioration in corporate health, data from the Reserve Bank of India's (RBI) financial stability report (FSR) show.

Tighter liquidity and a slowdown in the economy are now reflecting in the number of downgrades, analysts said.

In its report, the RBI said that there has been an increase in the share of downgraded/suspended companies during the September-December 2018 and January-March 2019 quarters.

RBI data shows that 14.71 per cent of the rating changes are either downgrades or suspensions by rating agency ICRA in the quarter ended March 2019, up from 11.76 per cent in the quarter ended December 2018, which was also higher than the 9.43 per cent downgrades and suspensions reported in the quarter ended September 2018. The jump was highest for Care Ratings which reported 17.42 per cent of the downgrades or suspensions in the quarter ended March 2019, up from 9.69 per cent downgrades in December 2018.

Madan Sabnavis, chief economist at Care Ratings, said the higher number of downgrades and suspensions reflect the current economic scenario.

"For Care, the number has been high because we rate a lot of small and medium enterprises which have borne the brunt of the economic slowdown which has been reflected in the downgrades," Sabnavis explained.

Data released in May showed that India's economic growth rate had fallen to a five-year low of 5.8 per cent in the quarter ended March 2019, mainly due to slower growth in agriculture and manufacturing. Growth in the fiscal year ended March slowed to 6.8 per cent, down from the 7.2 per cent reported a year earlier. The growth was the slowest since 2014-15.

Ratings downgrade have also been preceded by a liquidity squeeze for non-banking finance companies (NBFCs) which along with corporates accounted for more than half of the corporate bonds issued during 2018-19.

The IL&FS crisis led to the drying up of short-term market funds for these companies, impacting their funding profile and leading to downgrades of these instruments due to missed payment schedules.

NBFCs have since had to rejig their borrowings away from short-term commercial papers towards long-term bank loans.

The RBI FSR report shows that gross borrowings by NBFCs from CPs have fallen to 10 per cent in March 2019 from 13.1 per cent in September 2018.

Conversely, the proportion of long-term bank loans has increased to 33.8 per cent in March 2019 from 30.9 per cent in September 2018 as access to market-linked funds for NBFCs became limited.

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