The Hindu Business Line : Banking by rating

TILL A DAY ago Sachin Tendulkar seemed the lone world-class Indian. Now, Infosys and Tata Steel can proudly sport international colours with Standard & Poor's Ratings Services rating them higher than Sovereign India. S&P has marked up Infosys from BBB-/Stable to BBB/Stable and Tata Steel to BBB/Stable from BB+/Stable while India's rating stands at BB+/Stable. Rarely, if ever, have Indian corporates been rated higher than the sovereign.

This could be the best advertisement yet for private initiative as the two companies will be able to tap foreign funds cheaper than Sovereign India or any other Indian business entity on the lone strength of their efficient and credible books. Infosys, as a fresher, and Tata Steel, as an elderly player, have mostly wound down their ties with the banking system, with the former raising funds on international bourses and the latter sourcing cheaper foreign money for expansion and overseas acquisition. In many ways Infosys is software written after the 1991 reforms and early on had its share of scoffing sceptics who today applaud the man behind it all — Mr N. R. Narayana Murthy. At one time in the 1980s, Tata Steel was dubbed a sluggish mover while today it is sufficiently alert to snap up offshore companies. For S&P, these companies "demonstrate moderate leverage, strong free cash flow generation and competitive business portfolios."

Like Sachin, Infosys and Tata Steel worked splendidly hard. They stuck to the job they knew well, cut costs and denied themselves over-priced loans from the banking system. In the coming years more companies will do an Infosys, hurting an inactive Indian banking system dominated by government outfits. Indian companies raised $6.6 billion overseas in the first half of this fiscal telling adversely on Indian banks; yet, all the excess cash is not pulling interest rates down. After the RBI moved to a high interest regime to stub "inflationary expectations", bankers are huddling to hoist interest rates to 8 per cent from 7-7.5 per cent instead of pushing for fresh business at the latter level. That is most unfair as bankers and the RBI have agreed to re-work an opaque Benchmark Prime Lending Rate (BPLR), which prices a car loan at 8 per cent and a tractor loan at 12 per cent.

More than the cost of running banks it is the credit rating of the borrower which pegs the cost of bank funds. If Indian banks cannot trim costs after pouring money into IT, having low NPA levels and putting through VRS, corporates will jet it to London or New York for easy funds; stranded will be the farmers and the small-scale units, though this should not be the reason to squeeze them. The RBI admits that, "there is a public perception that there is underpricing of credit for corporates while there could be overpricing of lending to agriculture and small and medium enterprises." Over the last many years, the rural branches of Indian banks should have built a credit history of farmers to offer 7 per cent loans to the deserving. Bank chairmen prefer to be goaded by New Delhi into lending to Rural India when it is common sense to walk to the villages to build the loan book now bereft of quality corporates. Banks cannot be seen as signing off reforms.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Outsourcing captures Europe's imagination

Banking by rating

Country in quandary

The D factor — Making people deserve what they desire

Doha Round on a knife-edge

Culture is just the icing

Retail: Bonanza or trap?

New Fed Chairman from February — Daunting task before Bernanke

FDI in retail