Against the backdrop of sluggish economic conditions and high interest rate, close to 200 companies defaulted on their financial commitments in the last fiscal, according to a report by Crisil.
"Credit quality pressures have intensified for India's corporates in 2011-12. Instances of default by Crisil-rated entities increased to 188, the highest for any year" the rating agency said. As many as 105 companies out of 5,500 companies rated defaulted on their financial commitment in 2010-11, it said.
The annual default rate for Crisil-rated entities (about 6,000 entities) has hit a 10-year high of 3.4% in 2011-12.
The default rate for a specified period is the number of defaults among rated entities during the period, expressed as a percentage of the total number of rated entities whose ratings were outstanding throughout the period.
"These pressures are also reflected in the increase in banks' gross non-performing assets (NPAs; to 2.9% of advances from 2.3%), and in the quantum of debt restructured (to 3.3% of advances from 2.5%) between March 31 and December 31 of 2011," it said.
Downgrades exceeded upgrades in the second half of 2011-12 as Crisil downgraded 292 ratings and upgraded 266 ratings.
This marked a reversal in trend from the first half of 2011-12 when the rating agency upgraded 313 ratings, which was higher than the 207 downgrades.
The downgrades were driven by liquidity pressures and weakening demand, it said, adding, significantly, one-third of the downgrades were to the default category.
Crisil defines default as any missed payment on a rated instrument. This means that if a rated debt obligation is not serviced in full by the due date, the rating moves to 'Crisil D' or an equivalent.
"Weak liquidity caused by elongation of working capital cycles is the primary reason for the defaults. This trend is likely to persist with slowing demand," Crisil Managing Director Roopa Kudva said.
Highly indebted industries, including textiles, steel, construction and engineering, accounted for a fourth of the defaults. Textile exports have been hampered by weak demand, especially in the euro zone, she said.
Steel manufacturers have had to contend with higher input prices, she said, adding, industries dependent on investment demand such as construction and engineering, and industrial machinery have been affected by weak domestic demand, stretched working capital cycles, and high interest rates.
The credit quality of India's corporates will remain under pressure, given the slowdown in demand. However, high operating rates, softening in commodity prices and flexibility to defer capital expenditure will help players offset profitability pressures, and tackle slackening in demand, it added.
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