In a report, "From Moratorium to Loan Restructuring: The road ahead for India Corporate Inc", ICRA said the disruption caused by the coronavirus outbreak continues to adversely impact the credit quality of India Inc.
"The Q1 FY2021 performance of most entities has been expectedly weak, with sharp earnings and margin contraction in most sectors, as revenues dwindled much sharper than the costs," it said in a statement.
The agency has taken a large number of negative rating actions since the onset of the Covid-induced disruption and the lockdown, affecting around 16 per cent of its rated portfolio.
"The instances and the intensity of negative rating actions could have been higher but for the relief availed by the borrowers from lenders in the form of payment moratorium, as permitted by the Reserve Bank of India (RBI)," the statement said.
"Around 27 per cent of ICRA-rated entities availed a moratorium in payments from lenders."
The statement listed sectors in which there was a greater proclivity to avail a moratorium which included real estate, textiles, hospitality, engineering and auto ancillaries.
"At the system level, ICRA expects the proportion of the overall loan book under moratorium to decline to around 15 per cent by the end of Q2FY2021," the statement said.
Last month, a RBI circular laid down a framework to enable lenders to implement resolution plans while maintaining the account classification as 'Standard', even when the resolution plan does not involve a change in ownership.
Further, the Expert Committee constituted by the RBI has listed some specific financial metrics that define the contours within which the lenders are expected to formulate resolution plans.
As per ICRA's analysis, for several sectors, the 'Total Debt/EBITDA' and the 'DSCR' thresholds specified by the Expert Committee are less aligned with the actual ratios reported by the investment grade entities.
"From a rating perspective, this implies that if the loans are restructured in a cut-to-bone manner that the specified metrics are just met, without a further cushion, an investment grade rating might be difficult to achieve," the statement said.
"Further, while the parameters specified by the Expert Committee outline the boundary conditions for restructuring, in ICRA's opinion, the efficacy of resolution plans would depend on the appropriateness of the assumptions used by lenders while taking a view on business recovery."
However, according to the statement, based on the consumption and industrial trends, a large number of sectors have been reporting a gradual recovery to pre-Covid levels.
It cited that many sectors have recovered to 70-90 per cent of the pre-Covid operating metrics as of August 2020.
"This has been supported by rural demand in some sectors, and gradual easing of the lockdown measures in others. However, the road to recovery is expected to be long for sectors like airlines, hospitality and commercial vehicles," the statement said.
In contrast, sectors like pharmaceuticals and tractors have been relatively unimpacted by the pandemic as shown by the latest figures (July/August 2020) in comparison with the pre-Covid levels (January/February 2020) data.
"In effect, while the credit quality of India Inc. continues to remain under pressure, the trends in sequential recovery, if sustained, and the potential relief from loan restructuring could prevent a further weakening of credit profiles," the statement added.