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Ratings agency Crisil warned on Tuesday of more companies defaulting on their debt obligations as it expects the withdrawal of pandemic-induced relief measures, coupled with volatile commodity prices putting pressure on corporate costs, especially those rated in the category below investment grade.
The annual default rate almost halved to 2.2 percent in FY22, marginally higher than 2 percent in FY21, for two consecutive fiscal years amid a K-shaped recovery evident in default rates, Crisil said in a report.
Over the past decade, the annual default rate has averaged 4.1 percent.
However, the report warned that default rates could rise in the future as pandemic-induced relief measures are withdrawn and volatile commodity prices put cost pressures on the industry as a whole and on entities rated below investment grade. , in particular, dominated by MSMEs.
But the overall annual default rate continues to be tempered by a skew in the rating portfolio mix toward the more resilient investment grade category.
According to the report, the default rate for investment grade ratings declined in the last fiscal year in FY2021, while that for sub-investment grade rose across categories.
But for the sub-investment grade category, dominated by MSMEs, the default rate increased to 5.24% in FY22 from 3.90% in FY21, while the average was 6.1% between FY2011 and FY2020. d. Of the entities that defaulted in the last financial year, about 90 percent were MSMEs.
The report cites two reasons why overall annual default rates remain low. One of the reasons is the proactive relief measures announced by the regulators and the government, especially the loan moratorium and emergency credit guarantee lines, which have eased the pressure on credit profiles and prevented defaults to a good extent.
The second reason is the growing share of companies falling into the investment grade category.
Of the nearly 7,000 cooperative issuers rated by Crisil as of March 2022, 55 percent are in the investment grade category compared to 24 percent in March 2016.
This is primarily due to the higher frequency of sub-investment grade entities exiting rating coverage either through denial of assistance or withdrawal from the rating after lenders raised the minimum debt threshold required to receive a rating from the credit rating agencies. rating.
According to the report, the investment-grade default rate has typically been on the lower side, averaging 0.5 percent between fiscal 2011 and 2020, but hit a 10-year low of 0.03 percent in fiscal 2022 from an already low 0.17 percent in FY21.
Somasekhar Vemuri, a senior director at the agency, said recent trends in default rates reflect a K-shaped recovery that is faster and sharper for larger and medium-sized corporations, while MSMEs have suffered a disproportionate impact from the pandemic.
The increased level of stressed assets in the loan portfolios of MSMEs of banks and non-banks, as well as a large number of MSMEs benefiting from restructuring schemes, are also indicative of their stress. The default rate in the sub-investment grade category would have been even higher if not for the relief measures, he added.
According to the report, the increase in sub-investment grade default rates has not significantly affected overall default rates due to their declining share of the total rated portfolio over the years.
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