Moody’s-ICRA

Moody’s and ICRA held their In­dia Credit Con­fer­ence on the theme ‘In­dia’s fis­cal pol­icy chal­lenge, re­form progress and growth out­look’. High­lights:

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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.

Karthik Srini­vasan

Wil­liam Fos­ter

Alka An­barasu

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