India Inc credit quality to weaken, says Crisil

Rating agency Crisil today said the creditworthiness of Indian companies could take a downward turn in the coming years after three years of enjoying rising credit quality.

The likely fall in credit quality of Indian companies has been indicated by a decline in Crisil's modified credit ratio (MCR), the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations. MCR declined for the first time in three years to 1.03 in 2005-06 from an all-time high of 1.16 in 2004-05.

The 2005-06 MCR reflects nine upgrades and four downgrades in Crisil's long-term ratings portfolio as against 26 upgrades and two downgrades in the previous financial year.

Crisil said the trend reversal in its MCR is mirrored by the decline in the index of industrial production after three years of increase and an increase in real interest rates after three years of decline.

The IIP decelerated to 8 per cent in 2005-06 from 8.5 per cent in 2004-05. The sustained high energy prices and the significant capacity building, which may lower the operating rates in many industries, may constrain the manufacturing sector.

The real interest rates rose sharply by 2.68 per cent in 2005-06 against 0.25 per cent drop seen in the 2004-05. The interest rates have a strong bearing on global competitiveness of Indian companies since they are increasing integration with global markets.

Roopa Kudva, executive director and chief rating officer, said the impact of credit quality pressure will be gradual owing to the strong financial position that rated corporates have built up over time.

The sustained high energy prices, significant debt-funded capital expenditure, and upward momentum in interest rates would potentially contribute to credit quality pressure.

As 95 per cent of ratings carrying stable outlooks, the credit quality pressure is unlikely to result in significant downward rating movements in the next 18 months, Crisil said.

The decline is seen in manufacturing, infrastructure and the financial sectors. The financial sector is likely to continue to display a high degree of rating stability as most ratings in this sector take into account parent or government support. But manufacturing and infrastructure sectors are likely to show the impact of credit quality pressure over time.