Corporate stress yet to peak as additional 4 pc of debt could turn delinquent by FY22: Ind-Ra

The credit profiles of corporates are likely to remain under pressure as the economy grapples with a synchronised and prolonged economic slowdown, India Ratings and Research (Ind-Ra) said on Monday.

In its base case, at least Rs 10.52 lakh crore of the corporate debt (16 per cent of system-level corporate debt) is vulnerable to default over the next three years.

"Empirically, about 25 per cent of the vulnerable debt is likely to turn delinquent -- resulting in an additional Rs 2.54 lakh crore of delinquent debt," said Ind-Ra.

"This is likely to result in incremental delinquencies to the extent of 4 per cent of the system level corporate debt," it added.

 

However, in case the real gross domestic product growth slowdown intensifies (4.5 per cent over FY21-FY22), incremental delinquencies could be higher by an additional 159 basis points to 5.59 per cent of the system debt.

Alternately, in case of a sharp recovery in the gross domestic product (growth to 7 per cent over FY21-FY22), delinquencies could be lower by 87 basis points to 3.13 per cent of the system debt.

Ind-Ra analysed in detail the degree of vulnerability of the top 500 debt-heavy private sector issuers after assessing the mix between productive and non-productive assets (that is asset quality) held by each issuer along with their refinancing risk.

The report buckets issuers in five categories of vulnerability -- low, moderate, high, extreme and stressed. Based on these buckets, the agency arrived at the estimates of debt at risk and expected credit costs.

Ind-Ra's report details the base, bull and bear case estimates for system-wide credit costs based on the historical default rates and loss given default for each vulnerability bucket.

In particular, credit costs on the corporate book are likely to amount to 2.15 per cent of the system debt in the base case.

Furthermore, of the companies which are already stressed (that is recognised as defaulters by banks and credit rating agencies), lenders to at least half of these companies are likely to be required to take deep haircuts, given the inherently weak asset quality of these issuers.

However, the majority of the exposure to these accounts has already been provided for by the lenders.

Ind-Ra's report identifies the quantum of vulnerable debt by analysing the refinancing risk and asset quality for 11 sectors and places each sector in its vulnerability matrix.

The report further discusses the various components of refinancing risk -- business risk, liquidity and financial flexibility of the players in each sector.