Credit profiles of Indian companies could deteriorate up to 20%: S&P

Indian companies and banks in India could feel the bite of rising rates and inflation, but rated firms are better placed to withstand the pressure, said S&P in a report on Tuesday.

It said that a further hike in interest rates is on the cards as inflation remains above the RBI’s upper tolerance limit of 6 percent despite a 140 basis points increase in the policy rate in the current fiscal year.

Retail inflation fell to 6.71 percent in July due to a drop in food prices but remained above the Reserve Bank's comfort level of 6 percent for the seventh consecutive month.

In June, the Consumer Price Index was 7.01 percent, and in July 2021, it was 5.59 percent. It was above 7 percent from April to June this fiscal.

The report said the stress tests of more than 800, which are mostly unrated Indian companies, representing $570 billion in debt, showed credit profiles could deteriorate for up to 20 percent of Indian corporate debt. Renewable energy companies are more exposed to rising rates due to large capital expenditure.

Rated issuers are usually better placed to withstand rising rates and higher input costs. This is due to the significant deleveraging over the last two years and the improved liquidity position of companies, said Neel Gopalakrishnan, a credit analyst with S&P Global Ratings.

India's continued strong economic growth helps companies' revenues. Policy rates in India are rising from a low base, and most borrowers are accustomed to high-interest rates.

Indian borrowers have strong access to funding from domestic banks, including government-owned banks, with lower spread volatility than capital markets. The rating agency added that a significant deleveraging by Indian corporates amid a protracted downturn in the past decade

S&P said it expects the Indian banking sector to solidify its position. In the base case scenario, the sector's weak loans will continue to decline to 4.5–5 percent of gross loans by March 31, 2024. This category includes nonperforming loans (NPLs) and performing restructured loans. In such a severe stress scenario, NPLs in the banking sector could rise by 50 basis points (bps) to 75 bps. The impact on mortgages should be limited, it said.

In May, S&P cut India's growth projections for the current fiscal year to 7.3% from 7.8% estimated earlier, on account of high oil prices, slowing exports, and high inflation.

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