Moody’s and ICRA held their India Credit Conference on the theme ‘India’s fiscal policy challenge, reform progress and growth outlook’. Highlights:
Discussion 1: India’s fiscal outlook: Are fears of slippage overdone?
William Foster, vice president and senior credit officer, Sovereign Risk Group, Moody’s: For India to realize more of its potential, there has to be a shift from agri jobs to manufacturing jobs as well as robust growth in exports. India relies quite heavily on monsoon. In that sense, it is heavily exposed to climate change risks. State governments expect revenue to grow by 14% and expenditure by 11%. RBI figures gave a shock indicating doubling of state borrowings. This may be due to cash flow problems. But then there have been several cancellations of debt issues. There are still issues of GST cash flow. States could see growth in tax revenues from fuel. There are instances of waivers by various states. With states going for elections, we will not see any fiscal control. It seems that both the center and the states will not be able to push infrastructure financing.
Sajid Chinoy, JP Morgan: The risk of fiscal slippage is meaningful. Last 4 weeks have seen massive pressure to cut duties. The budget expected Rs1.12 trillion from GST collections. In this environment, can we meet disinvestment target of Rs800 billion. Growth can lead to tax buoyancy which can lead to increased GST and income tax collections. I hope the Finance Commission finds a way to rate the states. Right now, they pay the same price – whether they are prudent or not.
Ananth Narayan, SP Jain Institute of Management & Research: Even though we have seen the UPA and the NDA alternate, there has been continuity such as NREGA, Aadhaar, GST, etc. So that risk is not so high. The big risk is sentiment. If domestic withdrawals come in, then the capital markets will see problems.
Discussion 2: India’s financial institutions: What are the reforms & resolutions needed now that recapitalization is underway
Alka Anbarasu, vice president and senior credit officer, Financial Institutions Group, Moody’s: Initially it was felt that the recapitalization amount was sufficient. The second aspect was whether the provisional coverage ratio would be sufficient? This is now seen to be inadequate due to bond yield changes, frauds, etc. We feel that the recapitalization won’t be sufficient to restart lending growth. Banks did go out to the market in December and raised Rs100 billion. Given the decline in bank stock prices, the market may not be the right place to raise capital for the time being.
Karthik Srinivasan, group head, Financial Sector Ratings, ICRA: The government would not let weaker banks fail. So, it will have to provide capital to the weaker ones. Options for banks are either to sharply shrink balance sheet, or significantly improve recoveries.
Mohammed Ali Londe, assistant vice president and analyst, Financial Institutions Group, Moody’s: Regarding capital problems in insurance space, the sector has been facing solvency issues. They have seen 17% growth in FY2017 and expect the same in FY2018. This is supported by a growing economy. The premium growth has created pressures on solvency and capital adequacy. Govt’s agriculture and healthcare schemes have also created pressures as there is lower profitability in these schemes. External capital flexibility came in 2015. Additionally, re-insurance has been liberalized and so insurers now have a wider pool of re-insurance to choose from and get relief on capital front.
Karthik Srinivasan: Insurance companies can also raise tier 2 capital. We have seen some PSU and private sector players do that. The private sector has been able to increase stake of foreign shareholders to 49%, allowing them to raise adequate equity for next 2 years. Insurance companies should focus on profitability rather rely on regulatory support. As many 15 banks are said to be facing PCA, but a formal note was given only to 12. Banks were not expanding branches and going slow on credit.
Alka Anbarasu: We see all the 21 public sector banks as 1 entity. The government has talked for a long time about differentiation among banks, but it cannot let any of the banks fail. S,o the weaker banks take up a lion’s share of the capital and the stronger banks get nothing. If NPLs are resolved, the banks may come back into the lending market. PSU banks will start losing out in the fintech space and the fee-based income space. The newcomers are more active on the payments side. There is need for investments in risk management for new technologies.
Karthik Srinivasan: There are government mandates, but it also depends upon how the bank approaches the mandate. Private banks have managed to be ROE positive on government- mandated schemes. Also, there are senior positions vacant at PSU banks.
Mohammed Ali Londe: With regard to mergers and acquisitions in the insurance sector, it could be a solution for solvency. We have seen talks about PSU insurers being merged. Private insurers have gained from foreign partners on risk management and their asset quality has been more superior. We see M&A picking up in India.
Karthik Srinivasan: M&A has become a compulsion in the near term. Indian promotors are giving stakes to foreign companies. Topline focus on PSU insurers has led to a lot of bleeding. Mergers may reduce pricing pressures.
Alka Anbarasu: We think consolidation will benefit the banking system, in terms of quality of top management, board level reforms, ability to hire from market, etc. Many changes can be done that do not require changes in laws. However, reforms are not having an impact right now.
Karthik Srinivasan: At this stage, reforms agenda sounds good, but the banks are starved of capital. We remain a bankdriven economy and that would change in the near future. Once capital is given, then performance can be targeted. There is need to have people in the vacant positions. It’s a good idea to have specialized banks, but it has not worked very well in the past. Things have changed, especially technology. Reforms are needed to ensure risk transfer takes place, eg deepening of the bond market.
Alka Anbarasu: The big difference this time is the CIBIL database, which was not there earlier. Global liquidity is tightening and that is coming to India is well. But, it is growth that is attracting foreign capital to India.
Karthik Srinivasan: NBFC funding too is largely from banks. If banks cut down on lending, then they too will be impacted.