Although rating reaffirmations largely reverted to the 10-year average of 80 per cent in FY2023 (compared to 77 per cent in FY2022), the ratings that underwent a change remained skewed towards upgrades. As in the previous fiscal, FY2023 saw almost three upgrades for every downgrade, it said on Monday.

As the credit quality improved, the occurrence of defaults was also a lot lower in FY2023, Icra said, adding that there were only 22 defaults in its portfolio in FY2023, compared with 42 in FY2022 and 44 in FY2021.

Last week, India Ratings and Research said the corporate credit profile in FY23 exhibited one of its strongest performances in over a decade. The agency’s corporate downgrade-to-upgrade (D-U) ratio was at one of the lowest at 0.26 (FY22: 0.31).

In FY23, India Ratings upgraded ratings of 295 issuers, representing 21 per cent of the reviewed portfolio. Ratings downgrades were significantly lower, seen in only 78 issuers.

“Rating upgrades continued to draw support from sustained deleveraging, continued revenue and profitability growth and availability of liquidity. Domestic drivers seen through consumption-led demand (premium segment), investments (mainly government capex) contributed to the business growth,” India Ratings Senior Director Arvind Rao said.

Another rating agency Crisil Ratings on Monday said its credit ratio (rating upgrades to downgrades) moderated to 2.19 times in the second half of fiscal 2023 from 5.52 times in the first half of fiscal 2023.

There were 460 upgrades and 210 downgrades across sectors in the second half of FY2023, it said.

While the upgrade rate fell around 320 basis points from the first half, and stood at 13.46 per cent, it was still higher than the 10-year average (up to fiscal 2022) of 10 per cent.

Icra Ratings said real estate, financials, and textiles were the top three sectors in terms of rating upgrades. The warehousing and the office segments, where improved leasing activity and rising occupancy levels supported credit profiles, led upgrades in the real estate sector.

In the financial sector, several small to mid-sized NBFCs and housing finance companies (HFCs) were upgraded with a loan book ranging between Rs 500 crore to Rs. 10,000 crore.

Inflationary pressure amid weak pricing power was one prominent credit theme that prompted downgrades in FY2023, Icra said.

The debilitating effect of cost inflation was seen across multiple sectors, including building materials, food products, pharmaceuticals, gas-based power plants, etc. Rupee depreciation against the US Dollar provided another inflationary prop to commodity prices, and hence weighed on profits, it said.

Crisil Ratings said about 60 per cent of the downgrades in the second half of fiscal 2023 were in the sub-investment grade category and these largely comprised MSMEs. As much as close to 70 per cent of the downgrades were because of a decline in profitability and/or liquidity pressure.

Upgrades are expected to outnumber downgrades in fiscal 2024 as well, albeit at a slower pace, Crisil said.