Downgrade trend to persist for few more quarters: Crisil

Roopa Kudva, chief executive officer, Crisil told CNBC-TV18 that the growth scenario is lower compared to the last two years, which will hit corporate credit quality.

Crisil has analysed the debt balance sheets of about 10,000 companies. It highlights that upgrades to downgrades ratio has declined to 0.97 from 1 in the latest quarter.

Kudwa warned that the rising trend of downgrades is likely to continue for couple of more quarters. 

Below is the edited transcript of Kudva's interview with CNBC-TV18.

Q: How do you see the corporate debt scenario panning out? In Q1 we had most banks reporting higher NPLs. Now it appears that the downturn which we thought would be brief will be a 5% tick in terms of GDP growth for maybe the rest of the year. Do you see the corporate debt default rate getting much worse?

A: We have just revised our GDP growth forecast for 2012-13 and brought it down to 5.5%. So yes, a clearly lower growth scenario compared to what we have seen in the last two years. That will indeed have an impact on corporate credit quality and therefore to upgrades and downgrades and also to the quantum and nature of restructured assets.

If you look at upgrades to downgrades or the rating action ratio, for the last four quarters it has steadily declined from the level of 1 and reached the level of 0.97 in the latest quarter.

This essentially means that Crisil out of its portfolio of 10,100 companies that we rate in that portfolio we are downgrading more companies than we are upgrading. This is a trend that we certainly expect to continue and even worsen over the next two quarters. So, 0.97 will certainly go down further. How much further it’s not possible to say at this point, but certainly we do not expect it to go to the all-time low levels that we saw in the late 1990s of 0.67%.

Concomitantly defaults of companies have also risen. If you look at FY11 and 12 3.4% of our portfolio defaulted which was a 10 year high, so we had 188 companies defaulting. What are some of the common things that we are seeing amongst the downgraded companies and the defaulting companies? What is the key reason for the downgrades? If you analyse it sectorally there is no clear sectoral trend that emerges for the downgrades, however 56% of our downgrades are caused because of liquidity reasons.

So that is inability to raise enough money to meet repayment obligations coming out of either increased working capital requirements or capex funding requirements. The key thing therefore for us to watch out for is what is the refinancing ability of companies going to be going forward.

Q: Do you see an exponential growth in NPAs especially in the infrastructure sector especially if some corrective steps are not taken right away?

A: Restructured assets are a very interesting story and qualitatively very different from that we saw in the post Lehman time. Post Lehman we saw restructured assets to the tune of about Rs 1.3 trillion. The bulk of those restructured assets were small accounts.

Our last estimate of restructured assets was Rs 2.2 trillion. We are shortly going to release our new estimate of restructured assets which is going upto Rs 3.2 trillion over 2012 and 2013. The bulk of these restructured assets are large ticket loans with a loan size of Rs 1000 crore plus. So, it is very different from what we saw last time. The difference is coming because of the composition of the restructured assets.