Current Situation Remains Stable, but Prolonged Disruption Could Affect Specific Sectors

Recent events in Bangladesh have led to some concern about their potential impact on Indian businesses. However, according to CRISIL Ratings, the immediate effect on the credit quality of Indian companies has been minimal. The credit rating agency indicates that while there are no significant short-term impacts, longer-term disruptions could affect certain sectors, particularly those with substantial exposure to Bangladesh.

Limited Effect on Trade and Credit Quality

Currently, the disturbances in Bangladesh have not substantially impacted India’s trade. With India’s trade with Bangladesh constituting just 2.5% of its total exports and 0.3% of its total imports, the overall influence on credit quality is not expected to be severe. The major exports to Bangladesh include cotton and cotton yarn, petroleum products, and electric energy, while imports are mainly vegetable fat oils, marine products, and apparel.

Sector-Specific Impacts: Winners and Losers

Potentially Affected Sectors: Industries such as cotton yarn, power, footwear, soft luggage, and FMCG may experience minor but manageable negative impacts. For instance, Bangladesh represents 8-10% of cotton yarn sales for some major exporters, which could affect their revenue profiles. Additionally, companies with manufacturing facilities in Bangladesh faced initial operational challenges, though most have resumed operations.

Beneficiaries: Conversely, sectors like ship breaking, jute, and ready-made garments (RMG) are witnessing increased sales inquiries from key export markets such as the US and Europe. These industries are expected to benefit from the current situation.

Challenges for Export-Oriented Industries

Prolonged disruptions in Bangladesh could impact the revenue profiles and working capital cycles of export-oriented industries. The fluctuation of the Bangladeshi currency, taka, and potential delays in payments are factors that companies will need to monitor closely. Engineering, procurement, and construction firms involved in projects in Bangladesh might face delays and reduced revenue bookings this fiscal year, due to workforce issues and project disruptions.

Increased Debtor Risk and Forex Issues

An increase in debtor risk is anticipated for sectors relying on letters of credit (LCs) for transactions, with potential complications due to non-payment and dependence on Bangladeshi banks. Additionally, the depreciation of the taka against the rupee and other currencies is creating forex challenges.

CRISIL Ratings’ Ongoing Monitoring

CRISIL Ratings will continue to closely monitor the situation and assess its impact on credit quality. The agency remains vigilant to any developments that could alter the current assessment and impact Indian industries more broadly.