Around Rs 10.52-trn corporate debt may default over 3 years: India Ratings

Further, around 25 per cent of the vulnerable debt is likely to turn delinquent, resulting in additional Rs 2.54 trillion of delinquent debt.

At least Rs 10.52 trillion worth of corporate loans — around 16 per cent of the system-level corporate debt — is likely to default over the next three years due to prolonged slowdown in the economy. Further, around 25 per cent of the vulnerable debt is likely to turn delinquent, resulting in additional Rs 2.54 trillion of delinquent debt, according to a recent report by India Ratings & Research. This is likely to result in incremental delinquencies to the extent of 4 per cent of the system-level corporate debt, the report adds.

A loan becomes delinquent when a borrower makes payments late (even by one day) or misses a regular instalment payment(s).

India Ratings has taken into account top 500 debt-heavy private-sector issuers for the study after assessing their asset quality. The report buckets issuers in five categories of vulnerability — low, moderate, high, extreme and stressed.

The report details the base, bull and bear case estimates for system-wide credit costs based on the historical default rates and loss, given default for each vulnerability bucket. Credit costs on the corporate book are likely to amount to 2.15 per cent of the system debt in the base case.

"Of the companies which are already stressed (that is, recognised as defaulters by banks and credit rating agencies), lenders to at least half of these companies are likely to be required to take deep haircuts, given the inherently weak asset quality of these issuers," said Arindam Som, analyst at the ratings company.

However, in case the growth in real gross domestic product (GDP) sees a sharp recovery (around 7 per cent over FY21-FY22), delinquencies could be lower by 87 basis points (bps) to 3.13 per cent of the system debt. But, if the slowdown accelerates, to say 4.5 per cent over FY21-FY22, delinquencies could be higher by an additional 159 bps to 5.59 per cent of the system debt, the report added.

India's gross domestic product (GDP) growth slipped to nearly a 7-year-low of 4.7 per cent in the December quarter, owing to contraction in investment and manufacturing output. Looking ahead, GDP growth is set to stagnate at 4.7 per cent in the March quarter (Q4), too, according to the annual estimate by the National Statistical Office (NSO), which has forecast 5 per cent growth for full financial year.

Why do credit rating agencies keep missing big Indian company defaults?

India's major rating firms include Crisil, the Indian unit of S&P Global; ICRA, the local unit of Moody's Investors Service.

Mounting debt failures in India have been catching rating companies off guard, underscoring continued challenges a year after the landmark failure of shadow bank IL&FS increased scrutiny of the industry.

Defaults at companies including Dewan Housing Finance Corp., Cox & Kings Ltd. and Altico Capital India Ltd. have occurred even as their long-term ratings indicated very low to moderate risk of non-payment.

“Raters have not been able to detect stress in time,” said Ashutosh Khajuria, chief financial officer at Federal Bank Ltd. “Cutting credit profiles after the defaults is no rocket science.”

There’s a lot at stake as India tries to navigate a shadow-banking crisis and expand its debt market. The lack of more forewarning on payment problems has fueled questions about the quality of ratings, and could keep some investors away from corporate bonds, hindering market development.

India’s major rating firms include Crisil, the Indian unit of S&P Global; ICRA, the local unit of Moody’s Investors Service; Fitch-owned India Ratings & Research; and Care Ratings.

Crisil declined to comment on industry practices, adding that it didn’t rate most of the large credits that defaulted recently. ICRA, Care and India Ratings & Research didn’t immediately comment.

The securities market regulator strengthened disclosure rules earlier this year after rating firms failed to give ample warning on IL&FS group’s defaults from 2018, which triggered a prolonged cash squeeze in the nation. They now have to reveal annual default rates among the companies they evaluate.The new rules are set to improve the quality of ratings in the industry over time, said Somasekhar Vemuri, senior director at Crisil.

Business Standard