Management attitude towards risk will drive credit quality

11 April 2007

Corporate India''s credit fundamentals remain strong after four years of sustained improvement, according to CRISIL''s analysis of the trends in its rating actions. CRISIL''s modified credit ratio (MCR) for 2006-07 (refers to financial year, April 1 to March 31) continues to be above 1 at 1.01; this is marginally below the level of 1.03 recorded in 2005-06.

The trend of improving credit quality in corporate India, which started when an MCR greater than 1 was recorded in 2003-04, continued in 2006-07, but with lesser momentum. Given that CRISIL''s rated portfolio covers key sectors of the Indian economy, and includes most of the top players in each segment. CRISIL says the correlation of its MCR with key economic indicators has been proven over several years (see Box 1).

The significant improvement in Indian companies'' financial position over the last few years has been accompanied by a new-found confidence among corporate managers, resulting in a palpable increase in their risk appetite. With a large number of companies either announcing, or already in the process of implementing, large capacity expansions or aggressive acquisitions, the key to maintaining the current levels of credit quality depends on how well the growth is managed, and in what way it is funded.

MCR continues to decline
CRISIL''s MCR is defined as the ratio of upgrades plus reaffirmations, to downgrades plus reaffirmations over any given period. In 2006-07, CRISIL''s MCR for long-term ratings decreased to 1.01, falling steadily from an all-time high of 1.16 recorded in 2004-05 (see Chart 1). The MCR reflects five upgrades and three downgrades in CRISIL''s long-term ratings portfolio , as against nine upgrades and four downgrades in the previous financial year. (See Annexure for CRISIL''s upgrades and downgrades for long-term ratings in 2006-07.)