Corporate default rate hits 10-year high: Crisil

Crisil Ratings, which rates almost 9,000 companies comprising 40 percent of the corporate exposure of banks, today warned about the intensifying credit quality pressures of Indian companies .

It said the number of corporate defaults (on interest payments or principal) surged to 188, the highest annual figure so far. That puts the annual default rate at 3.4 percent, which is the highest in this decade, it said.

It feels like a repeat of 2008-09. In fact, this time, it’s a lot worse.

[caption id=“attachment_265020” align=“alignleft” width=“380” caption=“Going ahead, Crisil estimates Indian industry’s growth at 5.6 percent next year. Reuters”]  [/caption]

In a conference call to media, Pawan Agrawal, director of Crisil Ratings, and Somasekhar Vemuri, head of Crisil Ratings, explains, that after the global credit crisis of 2008, the Indian government allowed massive restructuring of loans to ease the liquidity pressures of companies. This time, there is not much scope for that. In fact, there are increasing liquidity pressures in the system and weakening demand in India as well as globally.

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According to Crisil’s owner, S&P Ratings, there’s a 60 percent chance that the eurozone is not expected to grow at all in the financial year ending March 2013. They also ascribe a 40 percent chance to the possibility of a decline of 2 percent in economic growth in the region.

As a result of this poor growth, Indian Inc will remain vulnerable to more debt restructuring and defaults in 2013. The three sectors that have performed exceptionally badly are textiles (9 percent of total downgrades), engineering and construction (10 percent of downgrades) and steel (7 percent of downgrades). Together, they make up 25 percent of total defaults this year.

Another reason for declining financial discipline among companies would be lowered profitability. The third quarter of the financial year 2012 (October-December) saw the lowest net profit margins – 9 percent – in the past four years. Industry has also grown at a poor pace of 3.9 percent compared with 7.3 percent in 2011.

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In the second half of the financial year ending March 2012, downgrades exceeded upgrades (292 ratings versus 266 ratings). That trend is expected to continue this year as well, said Crisil. That marked a reversal in trend from the first half, when Crisil upgraded 313 ratings and downgraded 207. And the company expects this trend to persist in the coming year as well.

Going ahead, Crisil estimates Indian industry’s growth at 5.6 percent next year. A fall in interest rates could help.