The Hindu Business Line : Crisil sees slowdown in credit growth

Mumbai April 13 Increase in interest rates and the Reserve Bank of India's actions to reduce liquidity in the system will lead to a slowdown in credit growth.

According to a ratings round-up by Crisil, banks will find it difficult to pass on the higher cost of funds as borrowers increasingly look at alternative sources, such as overseas borrowing and convertible bonds.

Crisil believes the profitability of financial sector entities may be affected, going forward.

"The increase in interest rates may also lead to an increase in delinquencies, especially in the retail portfolio of financial sector entities; this is, however, unlikely to significantly affect the credit profile of the entities, as a majority of financial sector entity ratings will continue to draw support from their parents," it said.

"This support is derived from the Government of India for public sector banks, and from foreign parents in case of multinational banks and non-banking finance companies (NBFCs)," said a press release by Crisil.

Crisil believes increased risk appetite of the Indian companies combined with higher interest rates, are likely to exert pressure on the credit quality of Indian companies.

"Based on the leverage normally used in projects in different sectors, Crisil estimates that the extent of debt funding would be about Rs 6,00,000 crore — an amount much larger than the total assets of the largest bank in India today," said the statement.

Risk appetite

"Corporate India has built a strong financial position based on four years of sustained good performance. The confidence that comes from such a strong position has increased the risk appetite of company managements," added the statement.

Corporate India's credit fundamentals remain strong after four years of sustained improvement, according to Crisil's analysis of the trends in its rating actions. Crisil's modified credit ratio (MCR) for 2006-07 continues to be above 1 at 1.01; this is marginally below the level of 1.03 recorded in 2005-06.

Crisil's MCR stands out as an indicator of systematic credit quality, and of underlying business fundamentals.

Credit quality

"The trend of improving credit quality in corporate India, which started when an MCR greater than 1 was recorded in 2003-04, continued in 2006-07, but with lesser momentum," said the press release.

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