Default rates at Indian companies likely to rise further: ICRA

Mumbai (Reuters): More Indian companies are likely to default on their borrowings in the fiscal year that started in April, compared with the previous year, on higher interest costs and a deterioration in business conditions, according to rating agency ICRA.

The default rate for Indian companies rose to 3.4% in the fiscal year ended March from 2.6% in the previous year, ICRA, the subsidiary of global rating agency Moody’s Investors Service, said in a report published yesterday (2 April).

“The default rate could go up in fiscal year 2019 on higher interest cost, deteriorating business conditions, likely difficulty in getting bank funding given the challenges in the banking system,” said ICRA Credit Policy Head Jitin Makkar in a webinar.

Besides huge stressed assets, banks are also likely to go slow on lending following the detection of more than $2 billion fraud at the country’s second largest state lender, Punjab National Bank, which could eventually hit the economy that grew at 7.2% in October-December 2017 but still below the 8% needed to hit full employment.

While the report showed that 646 companies were upgraded and 418 were downgraded, the trend did not mean that there was an improvement in the credit quality of the corporates, given that the volume of debt downgraded at INR 3 trillion ($46.08 billion) in the fiscal year ended March was sharply higher than 1.7 trillion rupees upgraded, ICRA said in the report.

Looking ahead, credit quality pressures will “take longer to dissipate” as hardening interest rates and banking sector woes will create hindrances for businesses, ICRA said.