The Hindu Business Line : Interest rates may drop for `high credit rating' borrowers

New scenario
Corporate ratings would begin soon for all classes of borrowers above Rs 5 crore
Banks have tied up with credit rating agencies — Crisil, ICRA, and Fitch, for assessing borrowers in the SME sectors

Bangalore May 14 For borrowers worried about the Basel II regime - this should be music. Interest rates could actually come down for some classes of borrowers, especially those with high credit ratings.

Bankers said that corporate ratings would now begin soon for all classes of borrowers above Rs 5 crore. Currently, only instruments are rated and migration to corporate ratings has begun, bankers said. The Reserve Bank of India's draft guidelines prescribe a risk weight of 20 per cent on corporates falling within the rating scale "AA", 50 per cent on "A", 100 per cent on "BBB" and 150 per cent on "BB" and below.

Each of these gradings reflect the creditworthiness of the borrowers, the last category being the least credit worthy. Bankers said the cost of credit would also reflect on the basis of these risks. Currently, the system was that corporate credit irrespective of rating scales faced a standard 100-per cent risk weight.

The Syndicate Bank's General Manager (Risk Management), Mr A.D. Chawla said, "The new regime will ensure lower costs for borrowers with high credit ratings. This will include even small and medium enterprises."

Some banks have already begun putting the rating regime into operation. Banks have tied up with credit rating agencies — Crisil, ICRA, and Fitch, for assessing borrowers in the SME sectors, who now comprise a substantial chunk of corporate credit offtake. Large corporates have already moved out of the bank credit and have begun accessing both the domestic and global credit markets directly for meeting their capital expenditure requirements.

Bankers said benefits of Basel II would also percolate onto other classes of borrowers as well. This included certain categories of retail borrowers, where the risk weights range between 50 per cent and 75 per cent. The reduced risk weights would entail lower capital charges. This would consequently translate into lower borrowing costs. This class includes categories of home loan borrowers, where the risk weights were reduced to 50 per cent in the recent lean season credit policy.

Banks with global scale operations are expected to comply with Basel II by this financial year, and those only with domestic operations by 2009-end. However, some domestic banks like Vijaya Bank have advanced their deadlines to September 2008 for Basel II compliance.

Bankers said the changed risk weights would, in turn, reduce capital requirement for credit risks. Only the operational risk would require capital. Capital requirement has been currently assessed at Rs 50,000 crore. But bankers said the actual requirement was likely to be far lower in view of the changes in the risk assessment that would unlock some capital.

As a result, bankers said that even after factoring in the operational risk components, most of them would still have a capital to risk weighted asset ratio of close to 12 per cent well above the regulatory requirement of 9 per cent.

NPA recovery

Besides, bankers also said that recoveries of non-performing assets (NPAs) would also lead to additions to the capital of the bank. Most banks currently have provision coverage of close to 80 per cent of their gross NPAs. But as the loans are recovered, the bankers said, they also had the option to write back the provisions and add to capital.

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