Corporates not immune from GDP contraction, risk from loans lower: Moody’s

Rating agency Moody’s on Wednesday said that corporates will not be immune from the deep economic contraction in India following the Covid-19 pandemic. However, the risks from corporate loans are lower now compared to 2012-19 period as both banks and corporates took steps in the last few years to repair asset quality and financial profile.

The disruptions from the outbreak will strain finances for households and small businesses more severely.

“While asset quality risks are rising for Indian banks amid the country’s economic contraction, risks from corporate loans have decreased from the previous credit cycle,” Moody’s said a statement.

“Corporates will not be immune from the ongoing economic contraction caused by the outbreak. Near-term stress at corporates is already visible in the very weak performance in the quarter ending June 2020,” says Srikanth Vadlamani, Vice President and Senior Credit Officer, Moody’s said.

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“With exposures to most corporates with weak financial health already recognised as Non -performing Loans, currently performing loans are better placed to withstand stress,” he added.

Lending in the past few years has been concentrated among stronger companies amid an overall slowdown in capital expenditure, while banks have also become more conservative in selecting borrowers.

Among the corporate sectors, loans to finance and real estate companies, which together make up a large share of total bank loans, are most at risk. Both sectors are facing operating cash flow challenges.

Sectors most affected by the pandemic and the lockdown, such as transportation and hospitality, are also vulnerable, although banks’ direct exposures to these borrowers are relatively small, the rating agency added.

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