Crisil’s Rating Action Ratio (RAR), an indicator of relative frequency of its upgrades and downgrades, declined 1.03 times in the first half (H1) of 2011-12 from 1.10 times in 2010-11. This trend reflects an increasing pace of downgrades and a sharply declining pace of upgrades.
In its earlier release in April 2011 on corporate India’s credit quality, Crisil had anticipated such a downward move, primarily on account of profitability pressures, and had also identified demand scenario as a key monitorable. Pressures on profitability have clearly been visible and are expected to continue, said a release.
Crisil believes that the slowing down of demand across a wide range of sectors over the second half of 2011-12 could reduce its RAR further. Profitability pressures on Indian corporate entities are evident— this has resulted in an increase in Crisil’s downgrade rate to 3.1% in H1 2011-12 from 2.9% in H2 2010-11.
The upgrade rate has also sharply moderated to 4.6% in H1 2011-12 from 6.3% in H2 2010-11. The contraction in margins is expected to continue because of high interest rates, wage and input costs, Crisil said.
“While the RAR has already started moving down on account of profitability pressures, we are expecting further downward pressure, primarily driven by demand moderation," said Roopa Kudva, managing director and chief executive officer, Crisil. "Signs of demand moderation are visible. Our analysis reveals that 10 of the top 20 industries (in terms of loans outstanding of the Indian banking system) are showing clear signs of slowdown in growth,” she added.
