BL Interview. Rating upgrades will continue to outpace downgrades in foreseeable future: ICRA chief

Nothing new really, but there are two or three things it has taught us. It has reinforced very strongly that no country is actually isolated. That point has been driven home in pretty much every country. Number two, it has improved the overall discipline within the analytical team of connecting the dots. No industry can be looked at in isolation. You have to see what pressures there are in terms of input costs, or as far as end users are concerned, and challenges that might come from the supply chain side. You should be able to connect these dots across the value chain to understand credit. In a steady state, where everything is status quo and things are going as per plan, it’s easy to just look at the numbers and give a more P&L and balance sheet analysis, as opposed to looking at it holistically to try and see where the truck can come from and where it can hit you. That wisdom is far more developed than what it may have been earlier.

Credit ratios (number of rating upgrades/ number of rating downgrades) have been trending well. Lots of corrective measures were taken by the industry even before Covid. The upgrades now are significantly higher than the downgrades (in H1 FY23 and also in FY22, instances of rating upgrades by ICRA were over three times that of downgrades). Given that much of the stress has been dealt with and rating actions have been taken, this trend should continue in the foreseeable future. That is also reflective in the more stable credit quality in the banking sector.

The clearly defined laggard is definitely the aviation sector. Under normal circumstances, if the aviation turbine fuel prices were under control, they probably would have bounced back to some semblance of normalcy. Unfortunately, they are really stuck there, and it’s difficult to say how long it will take to come back to a reasonable level. They’re hurting and it’s a competitive industry, so while all of them have increased prices, they can only increase it up to a point. That is certainly a complete outlier.

Hospitality industry is not completely out of the woods yet because a number of them are leveraged. While the revenue stream at this point might be decent, this has to be sustained for at least another 18-24 months. Commodities are doing well, their margin pressure has also eased, and while margin won’t be as high, they will still have a pretty decent run. Pharma will have some challenges because they need to get some of the imports from markets like China and Europe. They are struggling there due to input-related challenges. Infra-related sectors and cement, if you keep the margin pressure aside, should see a reasonably decent run, which is also the reason why you’re seeing a fair bit of expansion in the cement industry. Banks and NBFCs should see a pretty stable run.

In the new loans there is not much challenge because they are priced based on the current cost curve. Ability to reprice some of the existing loans might be a little of a constraint, which could result in some compression of margins. But naturally when they disburse the new loans, they have to factor in the repayment capability as well. Therefore, if interest rates keep going up, it will reach a point where it becomes unsustainable, and they will not be able to book loans at that price, or there will be a risk of credit cost going up.

Till about 4-5 months ago, consumer demand for housing was fairly robust across all markets. The challenge that most developers had was unsold inventory. They sat on it expecting prices to go up and then reached a point where they had to necessarily get rid of it. Meanwhile, steel and cement prices went up. So, the cost of building a house or developing a property was actually going up. Their ability to reprice was initially constrained, but most of them were able to pass it on. Then interest rates started going up and, therefore, every mortgage buyer had to factor in higher cost of borrowing, apart from higher cost of purchase. Because how much can you also increase EMI tenures by it will hurt at some point. To that extent, demand may be slightly subdued but once interest rates settle down, it should come back.

In spite of the rate hikes, non-food bank credit growth has been exuberant at 17.9 per cent y-o-y as on December 16, 2022, following two years of muted growth. This reflects a combination of factors such as the recovery in economic activity, higher working capital requirements, a shift from ECBs to local financing, as well as from the bond/CP market to bank credit. Rising interest rates could however temper credit demand in FY24; we expect credit growth to moderate to 11.0-11.6 per cent during the year while remaining in double-digits.

Fresh NPA generation has moderated for most lenders, and system level stress is expected to decline further. By March 2024, banking sector GNPA is expected to decline to 3.9-4.3 per cent, the lowest levels since September 2014.

We have rehashed our processes, changed our governance framework significantly, to make it much tighter. Our surveillance and monitoring mechanisms are far more robust. We have a number of teams who constantly do independent reviews of the ratings we assign, the processes and the outlook we have. You’ve got to be on top of the game, but one must also acknowledge that there is an element of dependence on the flow of data.

For instance, we have been asking for access to CRILC data base, in which banks are mandated to update the SMA status of every borrower. For us it’s very critical because that will give an indication of the credit quality and what is likely to go into default or is already in default. Right now, I have to rely on external data points. CRAs have been highlighting that you’re holding us responsible, we take the responsibility, but give us access to the database to have better control over the data. That is something we have been fighting for, but we’ve not been heard so far.