Tag: Ind-Ra

NBFC NPAs could increase by a third due to tightening of norms: India Ratings

Banking & Finance

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The Reserve Bank of India’s clarification accounting of non-performing advances is likely to increase non-banking finance companies’ (NBFCs) non-performing assets (NPAs) by around a third, according to India Ratings (Ind-Ra).

NBFCs would also have to invest in systems and processes to comply with daily stamping requirements.

Ind-Ra noted that NBFCs have asked the RBI to privide a transition period on this requirement.

Limited impact on provisioning

However, the impact on provisioning could be modest, because NBFCs use Ind-AS (Indian Accounting Standards) and higher rated NBFCs have a more conservative provision policy than IRAC (income recognition and asset classification) requirements.

All arrears to be cleared

The credit rating agency observed that the RBI clarification would allow stage 3 (credit impaired) assets to become standard only when all overdues and arrears (including interest) are cleared.

Earlier, NBFCs would classify an account as Stage 3 when there is a payment overdue for more than 90 days. Typically, for monthly payments, this would be when there are 3 or more instalments overdue on any account.

Also see: Deposit growth in alternative fortnights a contrarian trend: SBI Ecowrap

However, when the borrower makes a part payment such that the total amount due is less than three instalments, the account is removed from NPA classification and classified as a standard asset. It remains in the overdue category if not all dues are cleared.

Now, RBI has restricted movement from Stage 3 to Standard category.

NBFC borrowers are generally a weak class of borrowers and have volatile cash flows so once an account has been classified as NPA, it could remain there for a considerable period, said Pankaj Naik, Associate Director, Ind-Ra.

Accelerated pace of NPA recognition

Referring to an RBI circular requiring daily stamping of accounts instead of a monthly or quarterly one to count the number of overdue days, Ind-Ra opined that this would result in an accelerated pace of NPA recognition for accounts.

“Where there is cash collection, NBFC borrowers typically pay their overdues with some delays. Accounts can now get into NPA category for just a day’s delay in payment and once categorised as NPA will not be able to become standard unless all arrears are cleared.

Also see: Time to convert fintech initiatives into revolution: PM Modi

“So, in other words, accounts would get categorised as NPAs at a faster pace and would remain sticky in that category for a longer period of time. Both these accounting treatments would result into higher headline number for NBFCs,” said Naik.

He noted that it may so happen that NBFCs would disclose NPA numbers as per IRAC norms and Stage 3 numbers as per Ind-AS separately in their disclosures.

Varied performance across segments

The agency assessed that borrowers in the earn-and-pay model such as commercial vehicle finance, small ticket business loans, and personal loans to self-employed customers are vulnerable with volatile cash flows.

They are generally not in a position to clear all dues in one go and so the headline numbers would look elevated.

On the other hand, home loan and salaried personal loans could exhibit a better performance.

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CP market: Improving risk appetite needs close monitoring, says Ind-Ra

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Sustained easy money alongside improving risk appetite, as signified by the trend of overall rising number of issuances in the primary Commercial Paper (CP) market, coupled with healthy volumes in the second quarter (2Q) of FY22, requires close monitoring, according to India Ratings (Ind-Ra).

The credit rating agency has noticed certain instances of risks building up in relation to high-rated corporates raising short-term debt to take arbitrage opportunities because of low rates in the CP market.

For India Inc, low-cost CP is preferred route

The risk appetite in the system has improved, particularly in 2QFY22, driven by the strong corporate performance, buoyant external conditions and sustained ultra-loose monetary policy conditions, said Nikhil Changulani, Analyst, Ind-Ra, in a report.

The agency observed that a few large corporates, who have access to CPs at the cheapest cost (sub 4 per cent), are using arbitrage opportunities by increasing the use of CPs and enhanced drawings from some banks, thus opening up risks in the system.

Ind-Ra believes the risks to be presently limited to a few cases; but if not addressed could accentuate and spread to the wider baskets.

CP: market resilient in 2QFY22

Changulani noted that the CP market trend suggests that the market has shown resilience during 2QFY22 amid the uncertain period of the second wave of Covid-19.

“The overall rising number of issuances in the primary CP market coupled with healthy volumes has been the trend. Moreover, the rising number of issuers in a month suggests broadening of the market although there is a concentration risk pertaining to the tenor of borrowings.

Commercial paper issuances by corporates gather steam despite second Covid wave

“The risk appetite in the system has improved, particularly in 2QFY22, driven by the strong corporate performance, buoyant external conditions and sustained ultra-loose monetary policy conditions,” the analyst said.

In September 2021, the number of unique issuers in the corporate and finance segments increased to 74 (69 in August 2021) and 65 (60), respectively. The corporate issuers mopped up ₹73,900 crore (₹60,100 crore) while the finance issuers raised ₹42,900 crore (₹1,07,700 crore).

While the money market rates have remained historically low as a result of favourable environment and assurance from the RBI regarding loose policy stance, Changulani underscored the modest hardening in rates that was visible in October 2021.

Ind-Ra believes a sustained rise in commodity prices worldwide and looming supply-side shortage in various spectrums could pose challenge to the short-term rates.

The report said corporates are emerging from the second wave of Covid-19 and are tapping the CP market positively in anticipation of higher working capital requirement, owing to the high commodity prices coupled with a recovery in capacity utilisation.

IPO financing

The agency underscored that the concentration of issuances in the seven-day bucket is largely due to the initial public offer (IPO) financing in the equity market. On the other hand, three-to-four-month bucket mirrors the nature and origination of fund flows to mutual funds.

Non-banking financial companies (NBFCs) have been gaining the advantage of the excess liquidity and a favourable environment for tapping CP markets to raise short-term debt for financing IPOs, Ind-Ra said.

The months of June, July and August 2021 witnessed heavy activities in the IPO market and many NBFCs were active in funding IPOs.

NBFCs raised ₹59,200 crore in June 2021, ₹1,41,200 crore in July 2021, and ₹1,07,700 crore in August 2021 via CPs.

The agency believes the RBI’s capping of individual borrower’s limit for NBFCs to ₹1 crore for IPO financing would affect the oversubscription of IPOs and reduce CP issuances.

Ind-Ra opined that the spread between banks’ marginal cost of funds-based lending rate and CP rate could remain wide. However, the shorter end of the market rate could start inching up in 3QFY22 based on the expectation (of unwinding ultra-loose monetary policy) from the RBI.

Nevertheless, the wide gap between CP rates and marginal cost of funds-based lending rate will remain a driving factor for more traction by the issuers to tap the CP market in the near to medium term, the agency said.

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Heightened stress in retail, MSME segments due to Covid could weigh down banks, cautions Ind-Ra

Banking & Finance

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India Ratings (Ind-Ra) has cautioned that heightened stress in retail and micro, small and medium enterprise (MSMEs) could push out the banking sector’s inflexion point.

The credit rating agency also said that upward movement in yield curve could weigh down banks’ profitability.

Ind-Ra observed that safe bastion retail lending has fallen as pandemic drives higher delinquencies.

Indian banks to feel the effect of Covid second wave long after infections fade: S&P Global

In the case of MSME, notwithstanding the support in the form of the emergency credit line guarantee scheme (ECLGS) and restructuring, slippages could reflect from 2HFY22.

The agency noted that the agriculture sector has seen limited impact of Covid. The incremental stress addition from corporate segment has been at low levels.

Continuing systemic support

Ind-Ra, however, has maintained a stable outlook on the overall banking sector for the rest of FY22, supported by the continuing systemic support that has helped manage the system-wide Covid-linked stress.

It observed that banks also continue to strengthen their financials by raising capital and adding to provision buffers, which have already seen a sharp increase in the last three to four years.

‘Significant impact on profitability of Indian banking system’

The agency, in its “Mid-Year Banks Outlook”, has kept its FY22 credit growth estimates unchanged at 8.9 per cent for FY22, supported by a pick-up in economic activity post 1QFY22, higher Government of India (GoI) spending, especially on infrastructure, and a revival in demand for retail loans.

For FY22, the agency estimates the banking sector’s gross non-performing assets (GNPAs) at 8.6 per cent (against 10.1 per cent forecast made in February 2021) and stressed assets at 10.3 per cent (11.7 per cent). It expects provisioning cost for FY22 to increase to 1.9 per cent from its earlier estimate of 1.5 per cent.

PvSBs: market share gains

“Ind-Ra’s Stable outlook on large private sector banks (PvSBs) indicates their continued market share gains, both in assets and liabilities, while competing intensely with public sector banks (PSBs).

“Most have strengthened their capital buffers and proactively managed their portfolio. As growth revives, large PvSBs are likely to benefit from credit migration due to their superior product and service proposition,”said Karan Gupta, Director.

The agency’s Stable outlook on PSBs takes into account continued government support through large capital infusions (₹2.8 lakh crore over FY18-FY21 and further ₹20,000 crore provisioned for FY22).

The government’s support to PSBs has resulted in a significant boost in their capital buffers over the minimum regulatory requirements, significant improvement in provision coverage to 68 per cent in FY21 (FY18: 49 per cent), overall systemic support resulting in lower-than-expected Covid stress and smooth amalgamation of PSBs, Gupta said.

As per Ind-Ra’s analysis of the impact of a reversal in the long-term yield curve on the investment portfolio of banks, it expects an adverse impact on the profitability with a 100 basis points upward shift in the yield curve.

This could impact the pre-provisioning operating profit of PSBs by 8 per cent and that of PvSBs by 3.2 per cent while for the overall banking system, the impact could be 5.8 per cent.

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Outlook for non-banks and housing financiers shifts to ‘improving’ from ‘stable’: Ind-Ra

Banking & Finance

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India Ratings and Research (Ind-Ra) has changed the outlook for retail non-banking finance companies (NBFCs) and housing finance companies (HFCs) to “improving” from “stable” for the second half (2H) of FY22.

The credit rating agency opined that adequate system liquidity (because of regulatory measures), along with sufficient capital buffers, stable margins due to low funding cost and on-balance sheet provisioning buffers, provides enough cushion to navigate the challenges from a subdued operating environment.

This operating environment could lead to an increase in asset quality challenges due to the second Covid wave impacting disbursements and collections for non-banks.

Ind-Ra observed that the operating environment is dynamic due to the likelihood of a third Covid wave, its intensity, regulatory stance and its impact.

After a lull, NBFCs banking on better times

The agency believes the segments facing heightened delinquencies for non-banks are two-wheelers, passenger vehicles, unsecured and secured business loans, microfinance and commercial vehicles. It expects these segments to remain under pressure during 2HFY22 as business momentum remains subdued.

The housing and gold finance segments have been more resilient to the pandemic and would remain so over the medium term.

The agency believes that in this environment, meaningful variations are likely in the performance among different asset classes, which would reflect on non-banks, depending on their assets-under-management mix.

RBI aligns deposit-taking norms for HFCs with NBFCs

“NBFCs with a diversified asset mix and non-overlapping customer segments could be considered better placed to navigate operating challenges and may report a less volatile operating performance,” Jinay Gala, Associate Director, Ind-Ra, said.

High delinquencies

The agency found that asset quality for non-banks had deteriorated in FY21, and there was a build-up in 1Q (April-June) FY22, keeping headline numbers elevated in FY22.

The overall stressed book (gross non-performing assets plus restructured book) for the top 10 NBFCs rose to 6.4 per cent in FY21 from 5.4 per cent in FY20, Ind-Ra said.

Furthermore, the book’s benefit through the Emergency Credit Line Guarantee Scheme (ECLGS) would be around 5.1 per cent, where there could be slippages post moratorium, mostly in FY23.

Similarly, HFCs witnessed a rise in delinquencies where the overall stressed book for the top 10 entities rose to 3.8 per cent in FY21 from 2.3 per cent in FY20.

Ind-Ra underscored that the rise in delinquencies was high in 1QFY22 for NBFCs (top 10) and HFCs (top 10), where gross non-performing assets increased quarterly by 35 per cent and 26.5 per cent, respectively.

Gala observed that as the overall stress on the loan book is on the rise, loss, given default, could increase if resolution delays are longer than envisaged.

Due to the pandemic, there were frequent lockdowns across states, leading to difficulties in the enforcement of hard collateral and the possibility of a resolution through Section 13(2), SARFESAI, or through debt recovery tribunals, the report said.

“NBFCs are well capitalised to withstand any impact due to the fluid operating environment. Larger NBFCs have raised equity capital over the past 1-1.5 years and smaller NBFCs were anyway less levered. So, from a stress case perspective, the buffers are adequate to absorb any asset quality shock,” Gala said.

Unchanged growth

In FY22, the agency expects growth for NBFCs to be maintained at 9-10 per cent, in line with earlier stated expectations, and HFC growth could be maintained at 10 per cent.

Ind-Ra believes diversification in product lines remains crucial for non-banks to drive growth during cyclical downturns and to have a wider product basket that negates the risk of a single asset class franchise.

Impact on asset classes

In a report, Gala noted that growth in the commercial vehicle segment remains challenged, whereas certain sub-categories of vehicle finance such as tractors and small commercial vehicles could sustain their growth momentum during 2HFY22.

The gold segment, which witnessed reasonable growth due to rising gold prices in FY21, is likely to witness tapered growth in FY22, in the absence of a sharp pullback in prices, the report says.

Loan against property remains challenged where collateral values have been impacted due to the lack of resolution and challenges faced across micro, small and medium enterprises amid cash-flow disruptions, it added.

Further, lenders in the personal loan and business loan segments in the unsecured category are likely to be among the most impacted asset classes and the lenders would remain cautious.

Lenders are likely to look for stronger borrowers; supply-chain financing, where their obligations remain on strong anchors, could gain traction.

“The microfinance segment witnessed challenges during the second wave, where the collection efficiency was impacted due to the widespread nature of the pandemic in rural areas.

“Although collection efficiency and disbursements would improve, they will not without taking their toll in the form of elevated credit costs,” Gala said.

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Personal Finance

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The imposition of stricter measures on mobility across states in the wake of the second wave of COVID-19, India Ratings and Research (Ind-Ra) had opined in May 2021 that the overall microfinance sector’s collections could lead to a drop by a cumulative 10%-15% during the month compared to March 2021.

However, the collection lag in the second half of May 2021 was more severe than the agency’s initial estimates, and hence, collections during the month were down by 60%-70% for many microfinance institutions (MFIs). Accordingly, Ind-Ra has revised the MFI sector’s credit cost estimate range for FY22 to 5%-10% from 3%-6%, depending on the geographies of operations/concentration.

Nevertheless, Ind-Ra believes that most of the large MFIs rated by the agency would be able to absorb this through their income statement, with minimal impact on equity. The difference in the performance of the companies operating in this sector will be based on the funding available to them. Ind-Ra believes that larger MFIs with a diverse customer base are better placed to raise funding at competitive costs, and hence, reiterates its Stable Outlook for large and group-owned MFIs and a Negative Outlook for the rest for FY22.

During June 2021, with the lifting of restrictions in the first half of the month in the northern and western states of India, there was a modest improvement in the collection efficiencies of those regions. In the southern states, however, the restrictions began to ease very slowly only towards the second half of June 2021. In fact, the daily number of COVID-19 cases in Kerala is on an increasing trend again.

Overall, for a diversified portfolio, the collections in June 2021 are likely to have been higher by 5%-10% compared to May 2021. The restrictions continue to be tighter in the states of Kerala and Tamil Nadu due to slow control over COVID-19 cases. Against this backdrop, Ind-Ra expects south India-based MFIs (including small finance banks) to witness larger shortfalls in collections in 1QFY22 compared to those operating in other regions.

Ind-Ra expects the collection efficiency trends to improve over July-August 2021 compared to June 2021, given that around 70% of the borrowers of most MFIs are in the essential goods and services segments, and also taking into consideration the trends witnessed during the first wave of COVID-19. That being said, the variations in the performance of MFIs could be wider, depending on their level of concentration in regions where the lifting of restrictions could be slow.

As far as fresh disbursements are concerned, MFIs significantly curtailed their disbursements during April-May 2021 and the initial two weeks of June 2021. However, Ind-Ra’s discussions with MFIs suggest that the operations are gradually picking up on the back of improved mobility, with the staff slowly regaining the confidence to venture into the field. This by itself would aid the recovery efforts for MFIs.



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Banking & Finance

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The Government’s plan to privatise two public lenders could lead to a material negative migration of long-term issuer ratings, as well as ratings on Tier-II instruments of the banks, specifically amongst the weaker non-consolidated ones, said India Ratings (Ind-Ra). The ratings agency said the government’s outline of privatising, rather than divesting, could translate to ceding both the majority shareholding as well as control over the banks – which have not been formally identified yet.

“The agency believes ceding of control should make the proposal attractive for potential investors and may make it more viable to attract a large quantum of capital that this exercise may require,” said Ind-Ra in its assessment.

The ratings agency said it had a long-term issuer rating floor of IND AA, for government majority owned banks, which factored along timely government intervention and thus, minimal default probability. Hybrid instruments, such as AT-1 instruments, were rated on their standalone profiles – which factored in ordinary support from the government, largely due to the terms of Hybrid instruments which could prevent government support. “Ind-Ra’s rating of AT1 instruments for weaker government banks could be multiple notches below the long-term issuer rating, factoring the inherent weakness of the institutions along with discretionary nature of the security which could impact its ability to service the instrument,” noted the agency.

Ind-Ra, citing the example of IDBI Bank, the only lender the government has thus far ceded majority control in, said it would as per its criteria place the ratings on a rating watch, and accordingly take rating calls based on the ‘final contours’ of the transaction.



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Ind-Ra revises banking sector outlook for FY22 to Stable

Banking & Finance

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India Ratings and Research (Ind-Ra) has revised its outlook on the overall banking sector to stable for FY22 from negative.

The credit rating agency estimated that overall stressed assets (gross non-performing assets/GNPA + restructured) could increase 30 per cent for the banking system, with the increase being almost 1.7 times in the retail segment in the second half (October 2020 till March-end 2021) FY21.

Also read: States’ fiscal deficit to moderate to 4.3% of GDP in FY22: India Ratings & Research

The agency estimates gross non-performing assets (GNPAs) at 8.8 per cent in FY21 (FY22: 10.1 per cent) and stressed assets at 10.9 per cent (11.7 per cent).

Along with revision in outlook, Ind-Ra has upgraded its FY21 credit growth estimates to 6.9 per cent from 1.8 per cent and 8.9 per cent in FY22, with the improvement in the economic environment in 2H FY21 and the government of India’s (GoI) focus on higher spending, especially on infrastructure.

Referring to the revision in outlook, Ind-Ra observed that the substantial systemic measures have brought the system-wide Covid-19-linked stress to below expected levels.

Further, banks have also strengthened their financials by raising capital and building provision buffers.

According to its assessment, provisioning cost has fallen from the earlier estimate of 2.3 per cent for FY21 to 2.1 per cent (including Covid-19-linked provisions); it is estimated at 1.5 per cent for FY22.

Outlook for PSBs

Ind-Ra

revised the outlook on public sector banks (PSBs) to Stable for FY22 from Negative.

The agency reasoned that regulatory changes led to an improvement in the ability of PSBs to raise Additional Tier (AT) I capital, a high provision cover on legacy NPAs, overall systemic support resulting in lower-than-expected Covid-19 stress, and minimal surprises arising out of amalgamation of PSBs.

Also, the fact that the GoI has earmarked ₹34,500 crore for infusion in PSBs in 4Q (January-March) FY21d should suffice for their near-term growth needs.

Outlook for private banks

Ind-Ra

said the outlook remains Stable for private banks, which continue to gain market share, both in assets and liabilities, while competing intensely with PSBs.

“Most have strengthened their capital buffers and proactively managed their portfolios. As growth revives, large private banks would benefit from credit migration due to their superior product and service proposition,” the agency said in a note.

Stressed assets

According to Ind-Ra’s estimates, stressed assets will rise 30 per cent in 2HFY21 and 8 per cent in FY22.

The agency estimates that about 1.24 per cent of the total bank book is under incremental proforma NPA and about 1.75 per cent of the total book could be restructured by end-FY21.

“As a conservative measure, the agency has not adjusted for overlaps between those categories. This is the incremental stress purely on account of the Covid-19 pandemic and does not include the slippages that banks would witness in the normal course of business,” said the note.

Also read: Lenders remain risk averse to additional lending or alter lending terms: Ind-Ra

Ind-Ra estimated the stock of stressed retail assets for PSBs could increase to 2.9 per cent in FY22 from 2.1 per cent in FY21, while it could increase from 1.2 per cent to 4.3 per cent for private banks.

Provisions

Excluding Covid-19-linked stress, Ind-Ra expects the provision coverage ratio (excluding technical write-offs) for both PSBs and private banks to reach 75 per cent-80 per cent by end-FY21.

“If we consider the provision on proforma gross NPAs (still not considering Covid-19 provisions), the resultant provision cover could be about 70 per cent at end-FY21 and FY22, while the historic slippage rate will continue and banks would still have Covid-19 provisions as buffers.

“PSBs have 0.2 per cent-0.5 per cent provisions while private banks have 1 per cent-2 per cent Covid-19 provisions, most of which is unutilised,” the agency said.

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Banking & Finance

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India Ratings and Research (Ind-Ra) has revised its outlook on the overall banking sector to stable for FY22 from negative. This is because substantial systemic measures have reduced the system-wide COVID-19 linked stress below the expected levels. Banks have also strengthened their financials by raising capital and building provision buffers.

“Ind-Ra has upgraded its FY21 credit growth estimates to 6.9% from 1.8% and 8.9% in FY22, with the improvement in the economic environment in 2HFY21 and the government focus on higher spending especially on infrastructure. We estimate GNPA at 8.8% in FY21 (FY22: 10.1%) and stressed assets at 10.9% (11.7%). Provisioning cost has fallen from its earlier estimate of 2.3% for FY21 to 2.1%” said the agency in its report.

Key Findings

Private Sector Banks

  • The regulatory changes led to an improvement in public sector banks’ (PSBs) ability to raise AT I capital, a high provision cover on legacy NPAs, overall systemic support resulting in lower-than-expected COVID-19 stress.
  • Private Banks continue to gain market share both in assets and liabilities, while competing intensely with PSBs. Most have strengthened their capital buffers and proactively managed their portfolio.

Stressed Assets

  • Ind-Ra estimates that about 1.24% of the total bank book is under incremental proforma NPA and about 1.75% of the total book could be restructured by end-FY21.
  • Ind-Ra estimates that overall stressed assets (GNPA + restructured) could increase 30% for the banking system, the increase is almost 1.7x in the retail segment in 2HFY21.
  • The stock of stressed retail assets for PSBs could increase to 2.9% in FY22 from 2.1% in FY21, while it could increase from 1.2% to 4.3% for Pvt Banks.
  • Ind-Ra has assessed that stressed corporate assets as a percentage of gross bank credit declined to 15.3% at end-1HFY21 from 15.7% at end-FY20 (FY19: 17.2%, 1HFY19: 19.3%, FY18: 20.2%).

Provision Coverage Ratio

  • Excluding COVID-19 linked stress, Ind-Ra expects the provision coverage ratio (excluding technical write-offs) for both PSBs and Pvt Banks to reach 75%-80% by end-FY21.
  • The resultant provision cover is expected to be about 70% at end-FY21 and FY22, while the historic slippage rate will continue.
  • PSBs have 0.2%-0.5% provisions while Pvt Banks have 1%-2% covid provisions, most of which is unutilised.

The report further mentioned, “Under the Emergency Credit Line Guarantee Scheme, the GoI provided a guarantee to banks and NBFCs for extending funds to stressed MSMEs. Based on the progress seen till 25 January 2021, the funds sanctioned by banks under the scheme has totalled to INR1.98 trillion.” While Pvt Banks have been more adept at underwriting risk in the segment, they also have a higher share of unsecured retail assets where the borrowers have faced a disproportionate impact on their ability to service loans.

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Lenders remain risk averse to additional lending or alter lending terms: Ind-Ra

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India Ratings and Research (Ind-Ra) said lenders remain risk averse despite only 5 per cent of its rated 450 issuers in the mid and emerging corporates (MEC) space availing the Reserve Bank of India’s (RBI) financial restructuring facility available till December 31, 2020.

The credit rating agency, in a report, opined that bankers have remained extremely risk-averse to extend additional lending or alter the lending terms for issuers (companies) having weak liquidity, high leverage or where the credit profile is unlikely to improve in the near to medium term.

Ind-Ra observed that the relief package offered by banks and festival demand coupled with positive sentiments will partially abate the near-term liquidity headwinds for lower rated mid and emerging corporates.

Funding constraints

However, the agency expects funding constraints to increase for issuers having stretched liquidity and a weak credit profile over FY22 and FY23, reducing the financial flexibility for those that have not availed loan restructuring.

Of Ind-Ra’s rated MEC portfolio, 56 per cent of the issuers primarily belonging to the ‘IND BB’ and below rating categories depict a stretched liquidity profile. Of these, 74 per cent belong to the Discretionary and Industrial segments.

“Developments like the fear of a second wave of pandemic…the availability of liquidity with the issuers at end-1H (April-September) FY22 once the additional bank funding availed is exhausted are key monitorables,” said Shivani Suvarna, Analyst, Ind-Ra.

Ind-Ra believes that notwithstanding the short-term liquidity relief, reverting to the pre-Covid profile would be prolonged, especially for the ones belonging to the Discretionary segment.

The agency said it will continue to monitor the credit and liquidity profile of the issuers in the MEC space and could take negative rating actions for issuers having weak liquidity or deteriorated long-term credit profile or a combination of both.

Restructuring: lower-than-expected

Ind-Ra attributed the lower-than-expected restructuring to the various government measures and faster demand recovery in the domestic market, supported by a marginal pick-up in exports in certain sectors.

“Issuers having availed restructuring are primarily rated in the ‘IND BB’ and below rating categories with stretched liquidity.

“Such issuers belong to the Industrial and Discretionary segments and operate mainly in sectors such as real estate and construction & engineering,” said Suvarna.

Ind-Ra believes the lower restructuring stems from the ₹3 lakh crore Emergency Credit Line Guarantee Scheme and the Covid-19 loans provided by banks, offering respite to issuers with weak liquidity and increasing their ability to withstand the sustained cash flow pressures caused by the Covid-19 led lockdown.

“Even though not all issuers had availed the additional funding, the same has flowed down to the entities lower down the value chain.

“Many banks have also automatically converted the interest due on the working capital loans under moratorium into term loans, thus, eliminating the need for the issuers to apply for the restructuring scheme,” the report said.

Moreover, the revised definition of micro, small and medium enterprises (MSMEs) has enhanced the access of freshly included entities to funding from the financial system.

Restructuring: Sentiments

Ind-Ra also believes that the sentiments of the issuers have played a role in them not availing the restructuring scheme. The liquidity crunch endured by the issuers in 1HFY21, backed by the onset of a recovery in 3Q (October-December) FY21, has led to a belief of their increased resilience towards their liabilities.

The opening of offices, factories, retail stores and malls backed by the festival and marriage season demand has led to the issuers witnessing a steady recovery in their credit profiles over October – December 2020, the report said.

Recovery for players operating in the textile sector was augmented by a demand improvement in their export markets. The production and consumption of steel have been improving month on month, backed by an increase in demand, reflecting in its prices.

The automobile industry also grew 6 per cent year on year on December 31, 2020, aided by festival demand, thus imbibing confidence in the small-medium scale auto dealers and OEM manufacturers.

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