NPA levels may rise to 4.4% by March as corporate credit quality falls: Crisil

Credit rating agency Crisil has reported an increase in the number of corporate downgrades vis-a-vis upgrades in the first half of the current financial year ended 30 September 2013.

Crisil said its credit ratio, which is the proportion of upgrades to downgrades, stood at 0.87 per cent for the first half of the current fiscal ended 30 September, with 478 downgrades against 417 upgrades.

The ratio, which has stayed under 1 for the last two years, could impact banks' asset quality and raise the proportion of non-performing assets, Crisil said.

As much as 86 per cent of the downgrades were due to demand slowdown and stretch in liquidity, caused mainly by delays in receivables. Crisil said these problems, along with high interest rates, mean credit quality of corporates will remain weak in the near term.

"Going forward, demand and adequacy of funding will drive credit quality of companies. The downgrades will continue to outnumber upgrades in the near term, and the intensity of downgrades may even increase," the rating agency warned.

Power, road transport and construction sectors witnessed the highest number of downgrades in the first half of the fiscal, Crisil said.

An analysis of 2,481 firms rated BBB- and above indicated that a fourth of these firms were highly vulnerable to demand slowdown and a sixth to liquidity constraints, Crisil said.

''Working capital management emerged as a clear differentiator of credit quality. Firms with longer working capital cycles – or gross current assets (GCA) exceeding 240 days of sales - have witnessed twice the number of downgrades compared with upgrades,'' the release pointed out.

''On the other hand, firms with prudent working capital management, as indicated by low GCAs of less than 120 days of sales, witnessed more upgrades than downgrades,'' it said, adding that a fourth of these firms were highly vulnerable to demand slowdown and a sixth to liquidity constraints.

A continuation of the ongoing stress could, over time, percolate down to the banks' asset quality, Crisil's senior director Pawan Agrawal said.

Gross non-performing assets of the system will grow to 4.4 per cent by the end of the fiscal, up from the 3.3 per cent in the same period of last fiscal, he added.

Systemically weak assets, which include gross NPAs plus 30 per cent of the restructured assets, will slip by 1.40 per cent to 5.7 per cent from 4.3 per cent last fiscal, according to Crisil.

The report said 30 per cent of the restructured standard assets, excluding the exposure to the state power utilities, have a chance to slip into NPAs over the next two years on account of the "L-shaped economic growth trajectory expected."

Going forward, demand and adequacy of funding will drive credit quality of companies. Crisil believes downgrades will continue to outnumber upgrades over the near term, and intensity of downgrades may even increase.

(See: With India Inc's credit quality on slippery ground, NPAs will rise: Crisil)