Longest slide in India credit quality since 2014 pressures Modi

By Rahul Satija

The financial health of Indian firms is worsening, adding pressure on Prime Minister Narendra Modi to come up with more measures to kick-start a sputtering economy.

Debt quality deteriorated for the fourth straight month in August, the Care Ratings Debt Quality Index showed. That’s the longest losing streak for the gauge that tracks 1,601 domestic firms since April 2014, and puts it at a 20-month low. India’s economic growth cooled for a fifth straight quarter to 5 per cent in the three months ended June, the slowest pace since March 2013.

“Essentially, the economic slowdown is weighing on the quality of debt in the country,” said Madan Sabnavis, chief economist at Care Ratings “We should see improvement in the quality once the economy picks up.”

Key Insights

  • India’s plans to expand its corporate bond market may come under pressure if credit quality continues to decline
  • Deteriorating financial health of firms is set to worsen the bad loan mess in the country, which already tops the list of those with the world’s worst bad-debt ratios
  • Banks may have to cough up more capital in provisions to meet risk-weight requirements after downgrades, hurting their credit growth

Key Facts

  • A string of debt defaults and a prolonged credit crunch following the collapse of major shadow lender, IL&FS group, last year have halved sales of rupee bonds rated below AAA so far this year to 691 billion rupees ($9.6 billion)
  • The government and central bank have announced a slew of measures including mergers of several state-run banks to jump-start the economy, and Finance Minister Nirmala Sitharaman said Tuesday that India is making all efforts to boost the economy
  • Passenger car sales have contracted for 10 straight months, plunging to 115,957 units in August, a 41 per cent drop from the previous year and the biggest decline on record

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