Rise in rating downgrades reflects slump in economy
Rating cuts outpace upgrades by two to one during Jan-June, first time since 2016.
An analysis of credit rating agency actions by Prime Database in the six months since January shows that downgrades outpaced upgrades by two to one for the first time since 2016. Downgrades were at 167 against 73 upgrades. To be sure, in 2016 too, downgrades were higher than upgrades though the gap was much less at 71-58, Prime Database said.
The Reserve Bank of India’s biannual Financial Stability Report (FSR) released late last month had showed that bank asset quality is on the mend and will continue to improve. The RBI pushed banks into embarking on asset-quality reviews in 2015 in order to uncover the true status of their loan books and the amount of rotten assets they held. This stood at around Rs 9.40 lakh crore at the end of March 2019, according to the latest data.
Bad Loans Expected to Fall
The report estimated that Indian banks’ bad loans as a percentage of the total would fall to 9% by March 2020, down from 9.3% in March, led by public sector banks (PSBs). The NPAs of staterun banks were seen declining to 12% by March 2020 from 12.6% in March 2019, the report said.
Rating company executives said that the increased number of aggregate downgrades during the first half of the year was a reflection of the downturn in the macroeconomic scenario. India’s economic growth slowed to a five-year low of 5.8% in the March quarter.
“This only confirms what we said in the modified credit ratio (MCR) earlier this month,” said Sanjay Agarwal, senior director, Care Ratings. “We are broadly seeing stress in two segments—small and large companies. While the small companies are facing a slowdown in business which has increased now, the large companies are facing a tighter liquidity scenario. This issue may not be systemic but on an individual basis.”
The executives don’t see anything contradictory in the RBI’s prediction of slower NPAs and higher downgrades. The latter don’t necessarily mean defaults, they said.
“We had mentioned in our March 2020 outlook that liquidity will continue to be the main driver of credit profiles,” said Soumyajit Niyogi, associate director at IndiaRatings.
“Since our outlook was released, the economic scenario has weakened further. Though systemic liquidity has improved, the situation for individual companies is not better. Together with the domestic economy, the global economy is also not in the best of shape. All these factors are manifesting in the numbers.”
The downgrades call for a watch on the economy but may not automatically mean that NPAs will rise.
“The downgrades are to do more with prime debt and is an indicator that the quality of debt has deteriorated. Yes, we have seen some large defaults but downgrades do not mean that NPAs will rise automatically,” said Agarwal of Care.