Mumbai, April 3: Defaults on interest payments or principal by companies has skyrocketed to a 10-year high, says rating agency Crisil.
Instances of defaults by entities rated by Crisil rose to 188, the highest for any year. It comes at a time companies have been grappling with the effects of the economic slowdown.
In a report released today, the rating agency added that the annual default rate (companies defaulting on principal or interest payment) touched a 10-year high—of 3.4 per cent—in 2011-12. Moreover, the fiscal year just gone by witnessed more downgrades than upgrades. During 2011-12, Crisil rated 9,000 entities.
The rating agency said various factors were responsible for the annual default rate standing at a 10-year high.
Even as profitability of many companies came under pressure because of high interest rates and rising input and wage costs, there were liquidity pressures as well. This came even as demand moderated in an economy that was slowing down.
Highly indebted industries that include textiles, steel, construction and engineering, accounted for a fourth of the defaults. While textile exports have been hit by weak demand, particularly in the Eurozone, steel manufacturers have seen higher input prices.
The year saw Crisil downgrading 292 ratings and upgrading 266 ratings. This marked a reversal in trend from the first half of 2011-12 when it upgraded 313 ratings, far higher than the 207 downgrades.
The rating agency observed that the downgrades were driven by liquidity pressures and weakening demand.
Instances of default by corporate houses is also visible in the gross non-performing assets (NPAs) of banks that rose to 2.9 per cent of advances from 2.3 per cent.
The rating agency, which is a subsidiary of Standard & Poor’s, is not too optimistic about the prospects for this year.
Crisil Ratings president Ramraj Pai said the credit quality of India’s corporate houses would remain under pressure because of the slowdown in demand.
He was, however, quick to add that high operating rates, softening in commodity prices and flexibility to defer capital expenditure would help players offset profitability pressures and deal with the slackening in demand.
Moreover, there was an increase in the quantum of debt restructured to 3.3 per cent of advances from 2.5 per cent between March-December 2011.