Atul Joshi, Managing Director and Chief Executive Officer, India Ratings & Research, a Fitch Group company, feels the banking sector has been drawing flak for many mistakes not committed by it.
In an interview with Business Line , he spoke of the changes that have come by in the business of ratings and the inability of India Inc to take on more debt without compromising its credit metrics. Excerpts:
What is your outlook on the borrowing cost for India Inc?
The borrowing cost may rise in the short term, but the same cannot be said of the long term.
There is a sentiment issue due to inflation and currency depreciation and, as a result, the good ones are getting painted with the same brush in some cases.
However, the loss given default (default less recovery) is close to zero.
Our banking system is one of the best in the world. Recovery of restructured loans is as high as 80-85 per cent.
Could you elaborate?
We did a stress test with non-performing loans (NPL) at 15 per cent and reduction in the pre-provision operating profit by 20 per cent.
The banking sector’s capital (common equity tier 1, upper tier 2 and perpetual debt) was adjusted for this reduction and, after providing for pension liabilities and bad loans (provision-coverage ratio at 60 per cent coverage), we found that only three public sector banks required capital and these were borderline cases.
The banking sector’s need for capital infusion is just over $2 billion.
It is unfair to criticise banks alone, as their NPLs are because of corporate India’s outstanding in 2008-09.
So, when do you do credit value adjustments to ratings?
We do credit value adjustments when the debt-EBITDA (earnings before interest, taxes, depreciation and amortisation) ratio of a company goes above or below the trigger, which warrants upgrade or downgrade.
What is the biggest governance issue in corporate India?
We need to watch out for companies which are leveraging beyond their capacity. There is no timely exit for investors from projects.
One can also see the same set of 35-40 borrowers for various hydroelectric, road and power projects not injecting equity in sufficient amount and timely manner in their group through various methods (preferential issue / rights / IPO / QIP/ sell-out). They have to manage their leverage better.
One can blame the government, but the fact remains that India Inc is not able to take on more debt without compromising its credit metrics.
Why have rating agencies suddenly become proactive in the last five years?
Rating is a key ingredient for investment decisions. Rating agencies have come out of the 2008 crisis with a lot of learning.
After 2009, we introspected on transparency and introduced rating triggers. Sectoral credit factors for large industries with rating band were introduced.
We do not rate if the rating criteria are not in the public domain.
What went wrong with the credit default swaps in 2008?
Nobody in the US anticipated a black swan and everything was based on past experience.
Our study on transition and default of AAA rated Indian companies shows zero default for AAA rated companies in the last 13 years.
For instance, we now strip everything up to the holding company level as equity at the special purpose vehicle level could actually be debt.
What is your policy on conflict of interest between business development and independence of the rating?
We have institutionalised the separation. Analytics and origination — they are watertight and have a Chinese wall. They cannot communicate with each other on fees, rating levels and timelines.
How do you ensure that rating done is free of bias?
Rating is by consensus and the first to vote on the rating is the junior-most person in the ratings committee. The chairman is changed if there is no consensus and the proposal is put to vote after a few days.