The impact of Covid-19 and the associated policy response is likely to result in an additional Rs 1.67 lakh crore of debt from the top 500 debt-heavy private sector borrowers turning delinquent between FY21 and FY22, India Ratings and Research said in a report on Monday, adding that this could take the proportion of stressed debt to 18.21% of the outstanding quantum from 11.57% at present.
This estimated stress will be over and above the Rs 2.54 lakh crore anticipated prior to the onset of the pandemic, taking the cumulative quantum to Rs 4.21 lakh crore. This constitutes 6.63% of the total debt, and the rating agency expects the corresponding credit cost to be 3.57% of the total debt.
Ind-Ra has 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 (i.e. asset quality) held by each issuer along with their refinancing risks. The report buckets issuers in five categories of vulnerability – low, moderate, high, extreme and stressed. Based on these buckets, the agency has arrived at the estimates of debt at risk and expected credit costs.
The agency believes that in a scenario wherein funding markets continue to exhibit heightened risk aversion, corporate stress could increase further by Rs 1.68 lakh crore, resulting in Rs 5.89 lakh crore of the corporate debt, or 9.27% of the total debt, becoming stressed in FY21-FY22. The resultant credit cost could be higher at 4.82% of the outstanding book. Consequently, 20.84% of the outstanding debt could be under stress in the agency’s stress case scenario.
“Although further revisions in the FY21 GDP growth expectations by itself may not lead to a change in Ind-Ra’s stress estimates, the risk of a significantly prolonged recovery in the economic activity through FY22 and a larger-than-anticipated dent on demand could even result in stresses surpassing the agency’s stress-case estimates,” the report said.
The progression of the pandemic, the policy response and its impact on economic growth as well as the actual build-up of stress could result in higher default rates and credit costs – in line with the peak levels experienced in the last decade, India Ratings said.
The agency expects the credit growth to fall 15% in FY21 as a result of tepid corporate capex, coupled with muted revenue. However, refinancing pressures will persist and securing timely funding could continue to prove challenging.
India Ratings said the Rs 4.81 lakh crore fresh credit demand by the top 500 debt-heavy private sector corporates may emanate from a mix of receivable financing and a further drawdown of unutilised bank limits to shore up liquidity, meet cash flow shortfalls and to fund various isolated pockets of capex spending – largely restricted to maintenance capex.
As economic uncertainties continue to linger, lenders are most likely to deploy their capital at the upper end of the credit curve with a shorter tenure, despite having adequate liquidity. “Lenders may turn even more selective – weakening the resource mobilisation ability of lower-rated issuers in the investment grade, including those rated in the ‘A’ and ‘BBB’ categories. Consequently, these issuers are at the greatest risk of facing rating transitions in FY21, although the rating sensitivities for various higher-rated corporates could also be tested,” the agency said in the report.