QUALITY DOES NOT MATTER...

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In September 2006, the global rating agency Fitch gave a red-alert to the Indian banking sector concerning the escalations in the total loans being extended. This warning was a general fall-out of the huge rise in retail lending. Looking at the wonderful opportunities in this particular sector and considering it to be the sunrise sector for the economy, one could perhaps dismiss this particular report as a false prophecy. But then that’s not the end of the story.

On October 22, 2006, domestic rating firm CRISIL published its report on the credit ratings of various sectors in the Indian economy, which asserted that pressure on credit quality (a measure of creditworthiness denoting a bond issuer’s capacity to pay back the amount) is only on the rise and may deteriorate in the coming 18 months. G. V. Mani, Director, Rating Criteria & Product Development, CRISIL endorses, “Going forward, increased input prices, high capital expenditure and higher interest rates, are likely to accentuate the credit quality pressures on this sector.” Also, the rising interest rates have minimal chances of easing out in the near term. While on one hand, the Indian economists are going gaga over the developments in the manufacturing sector, it is this sector that carries the lowest credit rating, representing the greatest danger. According to this report, the Modified Credit Ratio (MCR which numerically represents credit rating) has dropped to 1.0 during April-September 2006 as compared to 1.05 during the corresponding period of the previous year. Traditionally, it was the farm sector that was on the top of the defaulters list of Indian banks (much of which can be attributed to priority lending to the farm sector) and did the early damage in late 1990s, when Non-Performing Assets (NPAs) of Indian banks were 15.7% of loans. But the CRISIL rating is related directly to quality depreciation in corporate lending, which should necessarily serve as a wake-up call for the Indian banking sector.

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Source : IIPM Editorial, 2006, Arindam Chaudhuri's Initiative