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Crisil Says... RBI squeeze heightens corporate vulnerability

Monday, July 29, 2013

The recent steps by the Reserve Bank of India (RBI) to tighten liquidity, against the backdrop of sharp rupee volatility, will delay economic recovery and add to corporate India’s challenges, says CRISIL in its analysis on the likely impact of these measures on economic growth, sectoral demand, and the credit quality of corporates and financial institutions.

Says Roopa Kudva, Managing Director  & Chief Executive Officer, CRISIL, “Credit quality of corporates is likely to be weakened by slow growth in GDP, heightened currency volatility, and higher-than-expected interest rates. Specifically, stress will increase in sectors such as power, construction, engineering, and steel, and lead to higher non-performing assets (NPAs) in the banking system.”

It believes that India’s economic recovery will take longer than previously expected. Says Mukesh Agarwal, President, CRISIL Research “We have lowered India’s GDP forecast for FY 2013-14  by 50 basis points to 5.5%, given the reduced likelihood of interest rate cuts and weak momentum in both industry and services.” In contrast with 2009, the global environment is much more stable today, and challenges for India’s economy are mainly domestic. Industrial growth plummeted to a 20-year low of 1% in 2012-13, growth in private demand slowed down to a 12-year low of 4%, and private corporate investment continues to be weak.

RBI’s recent measures — capping the access of banks to systemic liquidity, and mandating a higher minimum daily cash reserve requirement — have halted the declining interest rate cycle and tightened systemic liquidity. CRISIL Research expects demand in the rate-sensitive sectors to remain under pressure. Slower income growth, and higher rates and fuel prices will impact automobile sales. Adds Agarwal, “We expect car sales to decline by 2 to 3%, and medium and heavy commercial vehicle (MHCV) sales to decline by 1 to 3% in 2013-14. We have also lowered growth in new home sales by 400 bps, and volume growth for steel and cement by about 100 bps.”

CRISIL expects credit quality pressures on corporates to continue, given the difficult environment. The pressure will be greater on firms with higher leverage and longer working capital cycles. In addition, refinancing pressures will increase for corporates on account of weak systemic liquidity. CRISIL’s analysis of the liquidity of 11,500 firms it rates indicates that cash accruals will be sufficient to service only two-thirds of the firms’ maturing term debt of Rs.1.1 trillion in 2013-14. Given the tight systemic liquidity, corporates will find it challenging to refinance the remaining one-third, (in terms of amount of debt and not in terms of number of firms) would have to be repaid through fresh refinancing.

Rating downgrades may, therefore, outnumber upgrades in the near term. CRISIL expects banks’ NPAs to increase to around 4% of advances by end-March 2014 from 3.3% a year ago.

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