As corporate earnings start to reflect the early pain from the coronavirus-induced lockdown, financial markets are yet to price in the deep impact, writes The Economic Times.
Analysts say deep pain awaits the markets over the next few months as some 1,000 debt papers mature during May-December and corporate earnings start reflecting the real impact of the lockdown in the April-June quarter numbers.
Financial markets are anticipating a major spike in defaults and delinquencies over the next few months, with 20-25% of outstanding loans said to be at the risk of going bad.
Indian banks are already grappling with some Rs 9.35 lakh crore ($123 billion) of soured loans, equivalent to about 9.1% of total advances at the end of September 2019. Some projections show bank non-performing assets (NPAs) could double to 18-20 per cent by the end of this financial year.
The deepest pain of such a surge in delinquencies will be felt in the mutual fund mart, as the industry is said to have nearly Rs 3.5 lakh crore exposure to the debt papers maturing over the next eight months.
Most of these papers have highest credit ratings, which make them relatively safer and less likely to default, but some of the papers rated below AAA will be under scrutiny, industry watchers said. But some of them may face rating downgrades in the days ahead.
Out of the total exposure staring at maturity, mutual funds have Rs 18,402 crore bets on papers rated below AAA and A1, the top ratings assigned by the credit rating agencies.
A Crisil assessment of Rs 16 lakh crore of debt across sectors projected a 50 per cent possible increase in the number of debt papers that may see downgrades and defaults this financial year. The power sector is especially vulnerable, and will be one of the worst affected ones with defaults and downgrades likely to increase 13-fold, the rating agency said.
“We perceive very high credit risk and deeper impact on revenues in auto components, real estate, gems and jewellery, airline, poultry and meat, textiles and construction sectors,” said Prasad Koparkar, who leads research at Crisil.
Non-banking financial companies (NBFCs) and microfinance institutions, which have been reeling under liquidity crunch since last few years, have to pay back Rs 7,137 crore to mutual funds by year-end.
“For large corporations, a cash crunch situation should not arise. Smaller ones are looking towards the government to provide some direct relief,” said Shyamsunder Bhat, CIO at Exide Life Insurance.