MUMBAI: Amid growing concerns over the health of the economy, corporate credit stress has plunged to a three-year low in the April-September period as more debt has been downgraded, according to a report.
The credit ratio or the number of upgrades to downgrades slipped to 1.21 for the April-September period from 1.73 a year ago, with 539 upgrades and 438 downgrades among the 11,000 companies rating agency Crisil maps.
In what is representative of more stress for the already leveraged firms, the debt-rated credit ratio dropped to low of 0.25 from 1.65 in FY19 as the value of debt downgraded trebled to Rs 1.39 lakh crore.
In a report on Tuesday, Crisil blamed the slower government spending, sharp fall in consumption and an interplay of global and economic factors for the situation. Economic growth has slowed down to six-year low in the June quarter, forcing Crisil's parent S&P to sharply lower its growth estimate to 6.3 per cent for FY20.
"Entities with higher leverage saw more downgrades as pressure from the demand slump intensified.
Declining profitability and stretch in working capital cycles also were reasons for the downgrades," Somasekhar Vemuri, a senior director at Crisil, told reporters on a call.
Companies across investment, export and domestic consumption witnessed downgrades, he added.
A third of the downgrades in the construction sector, while auto and allied accounted for 15 per cent, the agency said, adding stronger balance-sheets are helping auto companies to survive their worst crisis in two decades.
Vemuri said due to the slowdown there has been a pile-up of inventory and also receivables being pending for companies, which has led to pressures on credit ratios too.
The growth-propping government actions of the past few weeks are "key monitorable" going forward, the agency said, adding it is keeping a cautious outlook as it feels the trend of moderation in the ratio will continue.
If companies choose to pass on the benefit of lower taxes through a price cut to boost demand, it may help to push up the credit ratios, Vemuri said, welcoming the auto industry's moves recently.
There can be some ease on the working capital side as well through the government's moves on clearing bill payments and also measures to boost small exporters, he said.
Other factors which will be helping the credit quality going ahead will be the good monsoons, which can revive the sagging demand and also increased government spending, it said.