Recent developments in Bangladesh haven’t had a significant impact on India’s trade and going forward, the effect will vary based on industry/sector-specific nuances and exposure. We do not foresee any near-term impact on the credit quality of India Inc either.

However, a prolonged disruption can affect the revenue profiles and working capital cycles of some export-oriented industries for which Bangladesh is either a demand centre or a production hub. That, and the movement in the Bangladeshi currency taka, will bear watching.

Sectors such as cotton yarn, power, footwear, soft luggage, fast moving consumer goods (FMCG) may see a small but manageable negative impact, while ship breaking, jute, readymade garments (RMG) should benefit. For most others, the impact will be insignificant.

India’s trade with Bangladesh is relatively low, accounting for 2.5% of its total exports and 0.3% of total imports last fiscal (see annexure). Merchandise exports mainly comprise cotton and cotton yarn, petroleum products, electric energy, etc., while imports largely consist of vegetable fat oils, marine products and apparel.

For cotton yarn players, Bangladesh accounts for 8-10% of sales, so the revenue profile of major exporters could be affected. Their ability to compensate sales in other geographies will be an important monitorable.

Their operating profit margins, however, may not be significantly impacted because cotton-yarn spreads are already modest at present.

Companies into footwear, FMCG and soft luggage could also see some impact because of manufacturing facilities located in Bangladesh. These facilities faced operational challenges during the initial phase of the crisis. However most have since commenced operations, though a full ramp-up and the ability to maintain their supply chain will be critical.

Engineering, procurement and construction companies engaged in power and other projects in Bangladesh could see execution delays this fiscal as a sizeable portion of their workforce has been recalled to India for almost a month now. With only a gradual ramp-up in workforce expected, revenue booking could be lower this fiscal compared with earlier expectations.

Besides, companies supplying electricity could see delayed payment of dues.

Pertinently, debtor risk for most sectors may increase with major transactions being carried out through letters of credit (LCs), which could be invoked in the event of non-payment, leading to dependence on Bangladesh banks for settlement. Besides, forex issues are also rising due to the depreciation of taka versus the rupee and other currencies.

On the other hand, companies in the ship breaking, jute and RMG sectors are seeing an increase in sales inquiries from key export destinations such as the US and Europe.

Crisil Ratings will monitor the situation closely and keep assessing the impact on credit quality.