Rating Action Ratio to moderate in H2 of current fiscal on demand slowdown: CRISIL

MUMBAI: Credit rating agency, CRISIL today said rating action ratio (RAR) will moderate further in the rest half of the current fiscal after witnessing a drop on year-on-year basis in the April-September period due to reducing profitability of firms.

RAR, which indicates relative frequency of a credit rating agency's credit upgrades and downgrades, dipped to 1.03 times in the first half of FY12 from 1.10 times a year ago period. This shows higher number of credit downgrades and reducing pace of upgrades.

"Pressures on profitability have clearly been visible and are expected to continue. CRISIL believes that the slowing down of demand across a wide range of sectors over the second half (H2) of 2011-12 could reduce its RAR further," CRISIL said in a report today.

It said that while downgrade rate had increased to 3.1 per cent in H1 of 2011-12 from 2.9 per cent recorded in H2 of 2010-11, the upgrade rate had moderated to 4.6 per cent in H1 of 2011-12 from 6.3 per cent during H2 of 2010-11.

"The contraction in margins is expected to continue because of high interest rates, wage and input costs.....Signs of demand moderation are visible. Our analysis reveals that 10 out of the top 20 industries (in terms of loans outstanding of the Indian banking system are showing clear signs of slowdown in growth," the report added.

The report also pointed out that consumption-linked industries such as automobiles, real estate, textiles, and retail had seen significant impact on demand due to current economic environment.

While the rating agency has cut its growth estimates for passenger vehicles to two to four per cent, investment demand-linked industries such as cement, capital goods and construction had also witnessed decline in sales growth, it said.

CRISIL also predicts that exports will see moderation of growth in the future.

"While exports are buoyant so far, slowdown in the US and uncertain environment in Europe are expected to result in a moderation of growth," it said adding that this will have an adverse impact on rating performance of companies.

It also said that there was a clear weakening of credit quality of the Indian corporate sector with decline in interest cover ratio.

Further, other risk factors like unhedged foreign exchange exposures and difficulty in access to global funding will moderate growth rates of companies, which in turn may affect credit rating of firms in the future, it added.