Corporate debt worth Rs 10.52 lakh crore vulnerable to default: India Ratings

India Ratings and Research has said the credit profiles of corporates are likely to remain under pressure as the economy grapples with a synchronised and prolonged economic slowdown, with at least Rs 10.52 lakh crore of the corporate debt (16 per cent of system level corporate debt) vulnerable to default over the next three years.

“Empirically, about 25 per cent of the vulnerable debt is likely to turn delinquent, resulting in additional Rs 2.54 lakh crore of delinquent debt. This is likely to result in incremental delinquencies to the extent of 4 per cent of the system level corporate debt,” it said.

However, in case the real gross domestic product growth slowdown intensifies (4.5 per cent over FY21-FY22), incremental delinquencies could be higher by an additional 159 basis points (bps) to 5.59 per cent of the system debt.

“Alternately, in case of a sharp recovery in gross domestic product (growth to 7 per cent over FY21-FY22), delinquencies could be lower by 87 bps to 3.13 per cent of the system debt,” India Ratings said.

The agency said it analysed in detail the degree of vulnerability of the top 500 debt-heavy private sector issuers after assessing the mix between productive and non-productive assets (asset quality) held by each issuer along with their refinancing risk.

“The report buckets issuers in five categories of vulnerability — low, moderate, high, extreme and stressed. Based on these buckets, the agency has arrived at the estimates of debt at risk and expected credit costs,” the agency said.

The report has detailed the base, bull and bear case estimates for system-wide credit costs based on the historical default rates and loss given default for each vulnerability bucket.

“In particular, credit costs on the corporate book are likely to amount to 2.15 per cent of the system debt in the base case,” India Ratings said.

Furthermore, of the companies which are already stressed (recognised as defaulters by banks and credit rating agencies), lenders to at least half of these companies are likely to be required to take deep haircuts, given the inherently weak asset quality of these issuers. However, the majority of the exposure to these accounts has already been provided for by the lenders, it said.

India Ratings said it identified the quantum of vulnerable debt by analysing the refinancing risk and asset quality for 11 sectors and placed each sector in its vulnerability matrix.

The report also discussed the various components of refinancing risk — business risk, liquidity and financial flexibility of the players in each sector.