Credit Ratio Elevated At 1.79x Amidst Domestic Tailwinds In H2FY25: Crisil Ratings

The credit ratio moderated in the second half of fiscal 2024 but remained elevated at 1.79 times compared with 1.91 times in the first half, overall, there were 409 upgrades and 228 downgrades stated Crisil Ratings in its recent report.

The outlook for India's economic growth is positive, with GDP expected to expand by 6.8 per cent, making it the fastest-growing large economy in the current fiscal year. The multiplier effect of government capex will continue to drive infrastructure and linked sectors, resulting in healthy balance sheets that will continue to support the credit quality outlook. Crisil Ratings expects the outstanding bank credit to cross Rs 200 lakh crore by March 2025, from Rs 172 lakh crore a year ago, despite a moderation in the rate of credit growth. 

However, growth is likely to moderate from the 7.6 per cent expected in 2023-24 as high interest rates and lower fiscal impulse to growth will temper demand, according to Crisil.

Crisil Ratings Managing Director Gurpreet Chhatwal said the three key pillars of India Inc's credit quality deleveraged balance sheets, sustained domestic demand and government-led capex -- kept the upgrade rate elevated in the second half of FY24.

"With balance sheets in most sectors at their healthiest, capacity utilisation around peak levels and expected interest rate cuts, a broad-based pick-up in private capex is finally in sight," Chhatwal said, adding that sectors with export linkages could have some uncertainties around them.

The financial sector’s (banks and non-banks) strong credit quality is supported by steady credit growth, healthy capitalisation and stable asset quality.

For banks, credit growth is expected to remain healthy in fiscal 2025, but grow a tad slower at about 14 per cent, compared with around 16 per cent estimated for fiscal 2024 FY24, given the likely moderation in economic growth. A key monitorable here would be theability to mobilise cost-effective deposits. While rising deposit rates could impact net interest margins, asset quality is likely to be benign with gross non-performing assets continuing to decline.

For non-banks, growth in assets under management may moderate to 15 to 17 per cent in fiscal 2025 from about 18 per cent in fiscal 2024 (FY24), with regulatory measures curtailing expansion of the unsecured loan book even as traditional segments grow at a steady pace. The asset quality outlook is stable for most non-bank segments but remains monitorable for unsecured and microfinance loans.

Somasekhar Vemuri, Senior Director, Crisil Ratings says, "The outlook on India Inc’s credit quality is positive for the first half of fiscal 2025, with upgrades expected to outnumber the downgrades. This is largely led by tailwinds from the domestic economy and despite export-linked sectors only gradually ticking up in the wake of uneven global recovery. Domestically, food inflation still weighs on rural demand even as the overall inflationary pressure eases. To maintain its favourable position, India Inc will need to be watchful of supply-chain disruptions from the escalation in geopolitical tensions."

Crisil Ratings Senior Director and Chief Ratings Officer Krishnan Sitaraman said there is a likelihood of interest rate cuts globally in 2024. "We expect the RBI to cut interest rates in the second half of the current fiscal," Sitaraman said, adding that credit quality is likely to remain positive.

The RBI is scheduled to announce its first monetary policy review for the current fiscal on April 5. For FY25, as many as 21 of 26 corporate sectors have strong to favourable credit quality outlook, marked by robust balance sheets and healthy operating cash flows -- expected to be as much, or higher, than in fiscal 2024.