MUMBAI: The declining trend in credit quality continued in the first six
months of 2008-09, with three long-term ratings downgraded and only one upg
raded.
CRISIL's modified credit ratio (MCR), a key indicator of credit quality,
showed a secular decline from a high of 1.16 times in 2004-05, to 0.98 times
for these six months. This time the intensity of decline and level of the MCR
are less adverse than in the previous period of continuous decline, which
included a historic low of 0.61 in 1998-99, because both manufacturing and
financial sector entities now have much stronger balance sheets. However, given
the unprecedented severity of the global financial sector turmoil and the
significant economic slowdown, the next 12 months will be critical for credit
quality.
Says Roopa Kudva, Managing Director and Chief Executive Officer, CRISIL
Ltd: "CRISIL will closely monitor three macro factors over the next 12 months,
as they will be the critical determinants of the credit quality of Indian
companies. These are the availability of adequate funding at reasonable rates,
the intensity of the demand slowdown, and the exchange rate."
In the first six months of 2008-09, there were two defaults in CRISIL's
portfolio of long-term ratings; both the defaulting companies were
manufacturing sector entities. This followed a three-year period without any
defaults, the longest such period in the past fifteen years.
According to Raman Uberoi, Senior Director, CRISIL Ratings: "Our latest
Ratings Round-Up shows that as on September 30, 2008, a little over 5 per cent
of CRISIL's long-term ratings had negative outlooks, the highest since CRISIL
introduced rating outlooks in 2003."
CRISIL expects intensified downward pressure on credit quality. The real
estate sector faces an immediate vulnerability to funding pressures affecting
creditworthiness. The demand slowdown in sectors like textiles, information
technology and automobiles has begun; sectors like telecommunications and power
would be less vulnerable to a demand slowdown. The banking sector benefits from
government support and strong capitalisation; these mitigate profitability
pressures due to higher funding costs and mark-to-market requirements on
investment portfolios, and asset quality pressures due to a slowing economy.
While NBFCs are clearly slowing down their business growth, the large ones
appear to be relatively better placed in terms of cash on their books and
access to bank funding.
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