When covid-19 began to infect the world, India’s economy was already under pressure from moderate demand. Subsequent lockdowns, disruptions in value chains and the demand shock have only made matters worse for most Indian companies.
It was to cover the resulting cash flow shortages that the RBI announced a series of measures, including a moratorium on debt repayment by all eligible borrowers. The moratorium window was two-stage – first from March 1 to May 31, then extended to August 31.
The response has been good, with no less than 2,300 of Crisil’s rated universe total, or around 8,000 companies, taking advantage of this opportunity. The constraint, however, has tended to differ, depending on the degree of the pandemic’s impact on individual businesses and their ratings, sectors and sizes.
Here are the main takeaways from the analysis:
Sub-investment grade companies are more vulnerable: of the 2,300 companies, three-quarters have sub-investment grade ratings (rated BB + or less by Crisil), leaving only a fourth in investment grade.
Lower quality companies, which otherwise have stable business models, struggle with leveraged balance sheets and stretched liquidity. Already struggling due to muted economic conditions, these have been the hardest hit by lockdowns caused by the pandemic and increased demand pressures. With business operations severely reduced, cash flow has almost dried up for most of these entities, which typically have few funding avenues beyond bank lines. Indeed, the average use of the bank limit for these actors is greater than 90%, which leaves very little cushion to absorb these cash deficits.
For these players, the moratorium was therefore the real oxygen.
Even companies rated in the investment category (BBB or higher) have benefited from the moratorium, albeit to a much smaller extent. These companies typically have stronger balance sheets, an adequate liquidity profile and more leeway to borrow, and also amortize their bank limit usage rates.
These actors have used the moratorium to build a cushion for any unforeseen demands amid the protracted lockdown and uncertainty around the trajectory of the pandemic.
Heavily affected sectors need a moratorium more: a sector’s resilience to the pandemic is assessed by its ability to return to normal. This directly depends on the nature of its products (essential / non-essential), the elasticity of demand, the strength of the balance sheet in terms of debt and liquidity, and the extent of government or regulatory support; and indirectly on the availability of manpower, logistical issues, bureaucratic and local authority requirements, etc.
As a result, heavily affected sectors such as gemstones and jewelry, hotels, automotive components, car dealerships, power (electric utilities, independent power producers and energy traders), packaging and capital goods and components saw one in five companies rated Crisil take advantage of the moratorium.
Low impact sectors such as pharmaceuticals, fast moving consumer goods, chemicals, agriculture, dairy and secondary steel, on the other hand, saw a very low proportion (only one in 10 ) request a moratorium.
Size of operations matters, too: with size comes the means to absorb unprecedented shocks and variability, and there could not have been a better teacher than the pandemic to get this message across.
The number of companies taking advantage of the moratorium in the medium-sized business segment ( ₹300-1,500 crore in turnover) was more than triple that of their larger peers (turnover of ₹1500 crore and more).
Mid-sized players forced to take advantage of the moratorium generally have little leeway available on the profitability front, limited ability to control costs, and relatively less leeway on their balance sheets.
However, their larger counterparts generally have more leeway in terms of margins to absorb cost pressures. Likewise, larger balance sheets offer greater financial flexibility.
In the middle, what to watch out for: The road to recovery is unlikely to be smooth. It may well be two or three quarters more before demand picks up, operations normalize, and cash flow stabilizes for most businesses.
Even as the moratorium comes to an end on August 31, RBI introduced a one-time debt restructuring plan to support cash-strapped businesses. Banks will be the final decision makers.
In addition to the hard-hit low-resilience sectors, a significant number of players who faced cash flow disruptions in the first quarter of this fiscal year, as well as project-stage companies that may not have any other source of cash flow. , would be ideal candidates to opt for the restructuring of their bank loans.
Timely use of this facility can help businesses manage their cash flow, which in turn will support their credit profiles.
Meanwhile, the evolution of the waiver of interest on deferred payments charged during the moratorium period will be interesting to watch. If the Supreme Court rules in favor of a waiver, it remains to be seen who will finance the resulting losses to the banks. Wider advice and clarification on this subject is awaited.
The author is Senior Director, Crisil Ratings
