In the second half of FY23, around 60% of the downgrades by CRISIL were in the sub-investment grade category and these largely comprised MSMEs. Nearly 70% of the downgrades were led by a decline in profitability and/or liquidity pressure faced by these companies.
The Narendra Modi-led government and the central bank during the Covid-19 pandemic had announced a slew of measures to ease credit pain, among others. However, with interest rates expected to hit a seven-year high with another potential increase and input prices still on the upper end, MSMEs now have to repay their restructured loans.
“The downgrade rates have started reverting to their long-term averages. Volatile commodity prices have impacted profitability, particularly of micro, small and medium enterprises (MSMEs), while export-oriented sectors face headwinds from a slowdown in their major markets,” said Gurpreet Chhatwal, Managing Director, CRISIL Ratings.
When the restructuring scheme was announced, around 6% of the loans to the MSME sector were restructured, as against an overall restructuring of around sub-2%.
“At that time when the pandemic was at its peak, we were expecting a higher degree of impact on the MSME sector, with maybe close to half of their loans expecting to slip into NPAs,” Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer told ET Online.However, with the economy rebounding, the MSMEs have fared better than expected.“So, our sense is that for the restructured loans, less than a quarter should slip into NPAs and with the increasing rebound in the economy, more and more MSMEs are coming back on track,” Sitaraman added.
Exports to see moderation
India’s overall exports of goods and services during April-March 2023 are estimated to reach $755 billion.
However, analysts have raised concerns that could be faced by export-oriented sectors as the recessionary worries continue to persist.
CRISIL expects this year’s export to grow at around 2-4% compared to its estimation of 5-7% growth last year.
“While the CRISIL Ratings’ credit quality outlook has a positive bias, the undertone is of caution because the full impact of the interest rate hikes on domestic demand is yet to be seen and a higher-than-expected global slowdown could further impact exports,” the agency said in a report.
Tightening of global monetary conditions and depreciation in Rupee could increase refinancing risk, particularly for companies with sizeable maturing overseas debt, which will also be close monitorable, it added.
The upgrade rate for export-oriented sectors halved to 12.2% in the second half of FY23 from 21.8% in the first half while the downgrade rate increased to 7.0% from 3.0%.
“However, some of the export-oriented sectors such as pharmaceuticals and electronic components continue to benefit from production-linked incentive schemes and increased global sourcing from India,” it said.
Furthermore, India Inc’s key credit ratios moderated sharply in the second half of FY23 on expected lines and are likely to go down further, the agency said.
Going forward, the key risk factors to watch out for, which may have an impact on the credit ratings of local companies, will be the slowdown in global demand and monetary tightening in the global markets, Chhatwal said.