RATING DOWNGRADES

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The current FY 201617, has reported a cascade of rating downgrades for corporate India, reflecting the worrisome state of their strained finances and falling profits, amidst an uncertain domestic economy, with uneven/ patchy growth. The rating downgrades have outnumbered the upgrades in the past 18 months, indicating the crying need for companies to rejig their businesses. The FE reports that after the downgrade of Lodha Developers, Reliance Comm and Tata Steel in January 2017, it was the turn of IFCI and IDBI in February, 2017. A further rating downgrade of banks with a mountain of bad loans, of almost Rs. 10 lakh crores is expected and should be no surprise for the markets. IFCI, a state owned lender was downgraded by ICRA, not just due to its huge dud loans, but also its perceived inability to recapitalise itself. While banks are already reeling under unprecedented bad debts, the falling ratings of corporates means that much more losses are headed their way. The ability of these companies to service their bank loans has been getting weaker by the day, predicting more stressed assets for banks. It also foretells the inability of the private sector to invest in new projects, a factor sorely missing in India’s lopsided growth story, which has been funded so far by government investments. Even a dynamic group like the ADAG, with overall bank loans of over Rs. 1.25 lakh crores, has reported cash losses in its bellwether companies like R Power, R Infra and R Com, displaying the stress on their balance sheets. A Credit Suisse report states that 35% of corporate loans are with chronically stressed companies, a matter of grave concern for India’s weak banks. Even the distress sales of assets by the likes of J P Group to repay loans, has not improved their state of affairs, as they manage to just remain afloat.

In such a scenario of rising corporate downgrades, private VC funds too have been unable to attract funds. The only funds making merry profits, are the vulture funds in the form of asset reconstruction companies which have been buying the asset carcasses of defaulted corporates, for a song and making huge profits.

The growing number of rating downgrades, that too of top corporates like Tata Steel, reflects the crisis that India faces and the immediate need to deal with the humongous NPAs that saddle banks. While banks are making desperate efforts, aided by considerably strengthened laws to recover loans, they continue to be in a pathetic state. The CBI investigations and arrest of negligent/corrupt bankers, has only worsened their state of affairs, as they now show obstinate unwillingness to lend, in a credit starved economy. The prevalent prescription for their revival is to set up a ‘bad bank’, to park all the bad loans of banks, so that special efforts are made for their recovery and normalcy is restored in the losses laden banks. A ‘bad bank’ is merely a statutory carpet to sweep away the bankers misdeeds under it, and is no solution to the present crisis. The recovery  of banks, which are now being downgraded, like their borrowers, is contingent on the recapitalisation of state owned banks by the government, to reinfuse the capital that they have lost due to reckless and corrupt lending practices. No amount of name and shame practices will improve the situation.

A certain number of stressed corporates, with rating downgrades can recover, if banks are willing to appropriately restructure their loans. Such restructuring would include not just the rescheduling of loans and pruning them by way of hair cuts, but also through radical measures that include a change of management and enable new managers to take over corporate reins. Banks will need to assist such deserving corporates to get out of their mess for their own good. Ironically, while downgrades rain on corporate India, its economy continues to be a bright spot, with its growth lauded by the likes of the World Bank and the IMF. The latest one to applaud India’s GDP growth is the noted American economist Steve Hanke who says that India’s GDP growth appears solid. But that cannot stem the flow of downgrades.

akhilesh@akhilesh.ca akhilesh@arbco.ca