Corporate show will drive performance of economy

Written by Sitanshu Swain | Updated: Jul 28 2011, 07:35am hrs
Rating agencies saw a great deal of upgrades in corporate ratings during the last year. With economy slowing down, in an interview with FEs Sitanshu Swain, DR Dogra, MD& CEO, Care, outlines how the rating agency is monitoring the situation.

How do you see the corporate ratings in terms of upgrade and downgrade for last six months Have things improved now or showing signs of stress

The picture looks quite stable over the last six months. In fact, in the period April-June we had done 166 ratings of which 118 were upgraded. In the quarter prior to this one, we had 92 upgrades in a total of 128 ratings. In terms of percentage of upgrades the ratio is roughly around 71-72% which shows that things have been relatively stable. However, it must be mentioned here that one has to make an allowance here that these numbers are based on the acceptances of companies of the ratings, which often takes time when there are downgrades where there is time spent in making representations which in turn takes time and leads to spillover effects across months. But, I do think that going forward the movement in interest rates and their impact on the industrial sector will be critical because this will be the major test for the economy which has shown a certain modicum of resilience so far.

In fact, the corporate sector too has fared quite well in Q4 of last year, and the initial results for Q1 of this year so far shows a stable performance, though we need to see more results to get a clearer picture. Therefore, I think the coming months would have to be monitored closely by us as we may see certain pressure points for the capital reliant sectors.

Will the corporate performance take a beating with economy slowing down

In fact, I will put it the other way round. Corporate performance will drive to large extent the performance of the economy, assuming a normal monsoon and farm output. The pressure on the corporate sector would come from the following areas: high commodity prices that will affect cost of production and high interest rates that will impact investment decisions as well interest costs. Inflation remains a challenge today and considering that it has shifted from food products to manufactured products, we can see a major challenge for this sector. In the past, companies have used effective cost reduction techniques in the form of better use of inventory and energy to cut costs.

But, if the RBIs rate hikes will impact cost of capital and consumption related borrowing, then top line growth would also come under pressure especially in the consumer goods segment. What, however, concerns me more is the impact on investment. Investment deferred for the present may not be as serious as the future consequences of capital goods not being available once the economy is on the rise. This will lead to supply-demand gaps as supply will take time to catch up with demand. This kind of a scenario could move the economy further downward as there are always leads and lags in investment fructifying into production. For this year, we are still sanguine of a 8% growth mark being maintained.

How do you see the banking industry in terms of business growth, net interest margin and non performing assets

Business would tend to be under pressure because banks will perforce have to adjust interest rates upwards as the RBI increases its policy rates. This has become more of a necessity as the RBI has strengthened the transmission mechanism to ensure that higher repo rates get reflected in higher cost of funds for banks as well as their base rates. Therefore, in a market where there could be some withdrawal of borrowers, banks will have to get more competitive which will get reflected in the NIMs.

Anecdotal evidence shows that a high interest rate regime does tend to get associated with pressure on NIMs as banks would give up a little on their earnings.

NPAs on the other hand have been more a function on the state of the economy because it is normally in a downturn that companies face pressure in meeting their loan commitments. We would have to hence monitor the performance of companies to get a clear view of this indicator. Last year, some banks did witness some increase in their NPAs despite the overall corporate performance being buoyant.