Credit worthiness of corporates takes a hit in lockdown

The lenders and corporate bondholders have a thing to worry about even as the optional moratorium on the loan repayments is yet to be lifted by the Reserve Bank: the creditworthiness of corporate borrowers.

The creditworthiness of the borrowers has gone for a toss during the lockdown period as well.

The country has seen a huge number of rating downgrades on corporate debt since the lockdown commenced on March 25. Subsequently, the RBI announced a moratorium on loan repayments.

Soon after, rating agency CARE Ratings downgraded the rating of 225 companies, compared with just 50 upgrades. Before the lockdown, in 2020, the rating agency downgraded the ratings of 271 companies, while simultaneously upgrading the ratings of 146 companies.

On the other hand, India Ratings has announced 68 rating downgrades, against just 15 upgrades. During the pre-lockdown period in 2020, the rating agency had downgraded 65 debt instruments, while upgrading the 30 instruments.

The more worrying trend, however, is the fact that while the amount of downgrades has more or less remained the same, the number of rating upgrades have almost halved in the post-lockdown period.

As a result, post-lockdown downgrades to upgrades ratio by both the firms have deteriorated to double that of pre-lockdown numbers of 2020.

For Ind-Ra, for every two upgrades, there have been nine downgrades. Before lockdown, in 2019, for every two upgrades, there were only 2.2 downgrades. In the case of CARE Ratings, it has worsened to 3.8 downgrades for every upgrade post-lockdown, from 1.9 before the lockdown.

As a result, the analysts expect floodgates to open, with Rs 5 lakh crore slippages in six months after the moratorium is lifted -- a trend that may threaten the stability of the already fragile financial system.