‘Defaults by Indian firms rise on tight cash, falling demand’

ENS Economic Bureau : Mumbai, Wed Apr 04 2012, 00:38 hrs


The double whammy of falling demand and tight liquidity over the last year has increased credit quality pressures for India’s corporates.

The annual default rate for 5,500 Crisil-rated companies hit a 10-year high of 3.4 per cent in 2011-12, the rating agency said in a research report. In total, 188 companies rated by Crisil defaulted in 2011-12 as against 105 in 2010-11.

In percentage terms, 2010-11 witnessed defaults at 3.1 per cent of the companies under coverage, while in 2009-10 that number was 2.7 per cent and in 2008-09 it was 0.75 per cent.

As a consequence, the gross non-performing assets (NPAs) for banks have gone up and the proportion of restructured debt has shot up to 3.3 per cent in the period between March-December 2011.

Portfolios rated AA and AAA, however, have performed better as there were no instances of default by any company in these categories. One AAA-rated company and 12 having the AA rating were downgraded.

“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,” said Roopa Kudva, MD and CEO, Crisil. A fourth of the defaults were accounted for by three sectors: textiles, steel and construction and engineering.

According to the report, textile exports have been hampered by weak demand in both the US and the euro zone countries, while the steel sector has been impacted by higher input prices. Construction and engineering have been hit by low investment demand, stretched working capital cycles and high interest rates. The report said that the spectre of defaults may continue if demand situation does not improve.

“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,” said Ramraj Pai, president, Crisil Ratings.

188 Cos rated by Crisil default in FY’12

Annual default rate for 5,500 Crisil-rated companies hit a 10-year high of 3.4 per cent in 2011-12

2010-11 witnessed defaults at 3.1 per cent of the companies under coverage, while in 2009-10 that number was 2.7 per cent

Portfolios rated AA and AAA, however, have performed better as there were no instances of default