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Ratings agency CRISIL said on Monday that the credit quality of India Inc was on a "slippery wicket" due to a demand slowdown, liquidity issues and higher interest rates. As a consequence, banks might see further slippages in their already deteriorating asset quality.
During the first half of the financial year, ended September, the agency downgraded as many as 478 companies, compared to 417 upgrades. It attributed a majority of the downgrades to demand slowdown and liquidity issues.
"Eighty six per cent of the downgrades were due to demand slowdown and stretch in liquidity caused by delays in receivables," it said.
Power, road transport and construction sectors witnessed the highest number of downgrades, it said.
The situation will remain grim due to continuance of the two factors and high interest rates. "Going forward, demand and adequacy of funding will drive credit quality of companies. The downgrades will continue to outnumber upgrades in the near term and the intensity of downgrades may even increase," it said.
Cautioning that the ongoing stress was likely to percolate down to the banks' asset quality, CRISIL senior director Pawan Agrawal said gross non-performing assets (NPAs) of the system would grow to 4.4 per cent by the end of the financial year, up from the 3.3 per cent in the same period of 2012-13.
Systemically weak assets -which it computes as gross NPAs plus 30 per cent of the restructured assets - will slip to 5.7 per cent from 4.3 per cent in FY13, it said.
About 30 per cent of the restructured standard assets, excluding the exposure to state power utilities, have a chance to slip into NPAs over the next two years on account of the "L-shaped economic growth trajectory expected", it said.
The power, road transport and construction sectors witnessed the highest number of downgrades in the first half of the year.
An analysis of 2,481 investment-grade firms had shown that a fourth of these were "highly vulnerable" to demand slowdown, while a sixth might witness liquidity constraints.
