The Hindu Business Line : ‘There is huge opportunity for credit rating business’

Mumbai, April 19 Even as the hard reality of 5-6 per cent growth in 2009 and 2010 is slowly sinking in, the credit rating business in the country is expected to have a smooth sailing. The positive outlook for rating agencies can be attributed to Basel II norms and the Reserve Bank of India’s stipulation that corporates with borrowings over Rs 10 crore have to necessarily get themselves rated, says Ms Roopa Kudva, Managing Director and CEO, Crisil. In an interview with Business Line, she talks about the challenges facing the economy and the financial sector in particular.

What is your assessment of the current scenario for Indian corporates with regard to credit?

Clearly, availability of credit has been constrained compared with the year ago period. Then, there were ample sources of funding available from within and outside the country. Companies had the option of raising money via external commercial borrowings and FCCBs. They also had the option of approaching banks and the equity markets for raising funds. Companies could also rely on their own cash accruals to fund their capital requirements.

Today, all sources of funding have dried up. Credit markets have frozen internationally as well as domestically; sources of funds such as mutual funds and NBFCs have run dry and the equity markets are in doldrums.

Compared with the September-October 2008 period, the situation has eased. But whether adequate credit flow is available is questionable. Banks are parking money with the RBI instead of lending to corporates. There is pressure on banks to lend more.

However, they are wary of lending as they don’t want to increase their future non-performing loans (NPLs).

Even assuming that banks are willing to lend, the banking system does not have enough money available to fuel 7-8 per cent growth. Deposits have grown only at an average of 16 per cent.

However, the fact that the entire system is dependent on only one source of funding is not good from a systemic perspective.

What are the challenges facing banks and other financial sector entities?

Banks’ NPLs are on the rise. From 2.3 per cent in March 2008, it is expected to increase to 2.7 per cent by March 2009, 3.5 per cent in March 2010 and to 4.5 per cent by March 2011.

Banks will also face a profitability squeeze due to higher NPLs and will have to make higher provisions in their balance sheets.

Banks’ interest spreads are also under pressure. Competitive pressure to mobilise deposits resulted in depositors being offered high interest rates. So banks are locked in at higher interest rates on bulk deposits and as lending rates are coming down, it will impact their profitability. Only in the last two months bulk deposit rates have come down.

On the positive side, most Indian banks are well capitalised with an average Tier-I capital of 8-9 per cent.

NBFCs are facing considerable shrinkage in their balance sheets.

They are dependent a lot on short-term funding. Unlike the last downturn where many NBFCs defaulted, this time the situation is better. Most of the NBFCs have strong parentage. They are meeting their short-term borrowings from the payments they are getting and are not lending afresh.

The mutual fund industry is the worst affected by the crisis as investors are liquidating their investment in mutual funds and depositing the proceeds in banks. The situation has improved in the past two months with the industry seeing positive growth.

How do you think the rupee will move?

It will depend on what happens globally to foreign capital flow. If by the end of the year things start looking up globally, then we can expect to see more money flowing back into India. Then the tendency of the rupee would be to appreciate again. Whether that will happen or when it will happen is uncertain.

When do you see demand picking up?

I think we are seeing acute stress. Things will get worse before they get better. You may see some blips here and there. Like February data was good for some industries. But the gems and jewellery industry had a 40 per cent decline last year.

We are projecting a further 15 per cent decline this year. Commercial vehicles saw a steep drop in the October-December quarter. I don’t think we are going to see an uptake for at least two more quarters to come.

The great wave or boom in American spending was the fuel for growth of the global economy and India. Of course, in India there is a strong domestic demand as well.

But now, the average American is saddled with debt. So, it is going to be a long while before the US consumer starts spending again. But countries such as the US will recover faster than Europe, because they are a larger economy, more diversified and resilient economy and dollar is the currency of the world.

I think we are going to see a lot of pain in 2009 and going well into 2010 and that will rub off on India. We are looking at 5-6 per cent growth rate for India in the next year and we have not yet reached the bottom.

How do you see the government borrowing programme panning out?

It is going to be huge. Deficit numbers are staggering. We have gone back to the numbers of the early ’90s. To fund the deficit, the Government will have to borrow. The worry is two fold. One is - its impact on interest rates. Two - Will it put upward pressure on interest rates and will it crowd out other borrowers from the market? If banks are lending to the government, will they have room to lend to other corporates?

What are Crisil’s expansion plans — acquisition and hiring?

We are always looking at acquisition. If there is an opportunity that is a good strategic fit and provides us a potential to expand our analytical platform then we will look at it. Valuations at one point were outrageous. Even now, there is room for valuations to come down.

We hired 250 people last year and we will hire the same number this year. The rating business is going strong because of Basel II and RBI’s stipulations that companies with borrowings of Rs 10 crore and above need to get a rated. We used to rate 400 companies about a year ago. Today we rate 1,500 companies. We see a huge increase in the number of rated entities.

How do you see interest rates moving?

It depends on government borrowing. There is pressure to keep it low. But if the Government starts borrowing aggressively it will put upward pressure. Once a new Government comes in and new programme become clear, there will be an upward pressure on interest rates.

Are Indian corporates going ahead with expansion plans?

They are going ahead. Investment hasn’t come to a standstill. Many projects are going ahead. Mahindra & Mahindra is spending Rs 4,500 crore in Chakan, Sterlite is going ahead with expansion plans, aluminium companies are making huge capital expenditure. Infrastructure spending on roads is continuing.

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