G Seetharaman

Mumbai: A rise in the number of ratings, especially bank loan ratings (BLRs), in the last fiscal could work well for the bond market in India, says a Crisil report. BLRs are the ratings of loans taken by corporates from banks to ensure their creditworthiness.

Till recently, there was scant demand for bond ratings below the ‘AA’ category. But now, 60% of BLRs fall in the ‘A’ and ‘BBB’ categories, according to the report.

“What this means for the bond market is that entities like mutual funds would look at bonds issued by companies with BLRs below the ‘AA’ category, which has not happened so far,” says N Muthuraman, director, criteria and product development, Crisil ratings division.

Kastubh Kulkarni, head of debt capital markets at Standard Chartered, does not seem to agree.

“I do not know if this will necessarily lead to a development of the bond market, because our bond market consists of interest rate traders who are not willing to take credit risks,” he says.

“The main investors in bonds rated below the AA category are pension and provident funds. Banks do not normally invest in such funds,” says S Raghavan, vice president and head of treasury at IDBI Gilts.

N S Paramsivam, head of treasury at Essar group, sees a different picture. He believes it will primarily be banks who will invest in bonds rated below the ‘AA’ category. He also sees increasing investment in the bond market because “liquidity is plenty and credit growth is slackening”.

After Basel-II norms came into effect in March this year for all banks with foreign branches and all foreign banks in India, banks have suggested that corporates get their loans rated by credit-rating agencies. As a result, BLRs accounted for about 21% of Crisil’s ratings in the last fiscal.

Crisil’s modified credit ratio (MCR) for the last fiscal stood at 0.97 times. MCR is simply a ratio of upgrades (For example, from ‘A’ to ‘AA’) plus reaffirmations to downgrades plus reaffirmations.

A reaffirmation means there has been no change in rating.

What an MCR of 0.97 times implies is that the number of downgrades last fiscal was more than the number of upgrades.

“This is the first time in four years that the modified credit ratio has remained below 1 for an entire financial year. It marks a reversal after four years of steadily improving credit quality for Indian corporates,” says Muthuraman.

As far as sector-wise downgrades are concerned, manufacturing saw five upgrades and eight downgrades, and infrastructure saw two downgrades. Moreover, the report says its long-term downgrade rate, at 6.49%, is the highest in four years, indicating the weakening of the corporate sector’s credit quality.

The long-term downgrade rate is the ratio of total longterm downgrades to total longterm outstanding ratings.

Throwing light on the Indian banking sector, the report states there could be a possibility of profitability pressure because of the high cost of funds for the banks.

But it sees financial institutions in India remaining stable, mainly backed by the capital raised through initial public offerings (IPO’s) and other avenues in the past 12 months.

Source : DNA