IMBSL's cash flows are likely to be severely affected consequent to its decision to retain fee-based activity and get out of fund-based business. This was necessitated as a result of the Securities and Exchange Board of India's directive calling for segregation of fund-based and non-fund-based businesses among market intermediaries.

Icra has listed the non-existent primary market and difficulty IMBSL would face in re-estabilishing itself as a merchant banker, having concentrated on fund-based business in the last few years as some of the factors that arelikely to affect cash flows.

On the asset side, the rating agency has said that IMBSL's assets such as inter-corporate deposits, bought-out deals, hire purchase and lease portfolio suffer from a high rate of delinquency. Its collection efficiency in its lease and hire purchase business has also significantly declined since its earlier rating.

According to Icra, the profitability is likely to suffer due to a high share of low-earning assets, unviable business levels and increased provisioning due to bad assets. Moreover, a significant portion of IMBSL's obligation is due for repayment next year, adding pressure to the already-battered cash flows.

Under the circumstances, the major or the only factor that seems to have weighed in the agency's mind in restricting the downgrading to a single notch from MA to MA- is the support from the parent company, Indian Bank. The latter is expected to sanction lines of credit to the extent of Rs 80 crore to enable IMBSL repay the deposits.

But the experience in thecountry of a parent company coming to rescue of its subsidiary has not been all that good. Profitable banks such as State Bank of India and Canara Bank refused to lend support to their mutual funds when required. Canara Bank finally bailed out Canbank Mutual Fund when it became clear that its plans of initial public offering would be in jeopardy if it did not do so.

Considering these points, Icra's decision to retain the rating within the investment grade on the expectation of help from Indian Bank -- itself mired in a mountain of losses -- is against the principle of conservatism that goes into rating a deposit programme. The possible help from the parent company has to be viewed in the context of high delinquency rate of IMBSL's assets. And the fact that the programme is not even on the rating watch is all the more surprising.