?We are likely to see more difficult times?

The whole dimension of the Indian economy, which was on a high growth path for past couple of years, changed negatively during the last nine months due to the global financial crisis. However post general elections, which saw a stable government in place, the country is a witnessing return of optimism rapidly on the growth front. Roopa Kudva, managing director and CEO, Crisil in an interview with Sitanshu Swain & Hemang Palan of FE does a reality check on this wave of optimism.

Crisil always spots a good or bad trend in the economy in advance. How do you see the current situation? Is the Indian economy on a recovery path?

The Indian economy is still going through a period of stress, although the rate of decline of growth has clearly decelerated. The extreme stress in the economy that we witnessed last September and October has gone now, thanks to very quick policy responses both by the government and the central bank. The focus of the policy response initially was to come very quickly out of that extreme liquidity crunch that we witnessed in last quarter of the calendar year 2008. However, we have not completely bottomed out.

Crisil expects that the manufacturing sector in corporate India will still continue to be under strain for some more time to come. This is mainly due to vital issues like availability of funds in the system and also the cost of funding. However, today the availability of money is definitely much better than what it was 6-8 months ago, but this availability is still restricted to the top layer of companies in the country.

Enough availability of funds is yet not there for mid-rung as well as smaller companies in India. The cost of funds still continues to be an issue. although now we are beginning to see the effect of the rate-cuts that were implemented six months ago.The issue in India is that monetary transmission is not as strong as it can be. And hence the lag effect of the previous rate-cut is being witnessed in the economy only now.

Today, liquidity in the system is ample. However, bankers are adopting a cautious approach while lending to corporates as they are concerned very much about their future non performing assets(NPAs).

How is the India Inc?s rating scenario?

In the year ended March 2009, Crisil upgraded ratings of only two companies, while downgrading 84 companies during the year. Between April and May 2009, we downgraded another 47 companies but upgraded not a single company. So the downgrades continue in this year too. However, the intensity of downgrades has definitely fallen. Our rated population of companies has significantly increased in the last six months. Till December 2007, Crisil had ratings of only 400-450 companies. Today, this number has risen to 2,000 companies.

In the January-March 2009 quarter of this year, we added 520 new companies to our ratings assigned list. We expect more downgrades and fewer upgrades to happen in the current financial year. But there is some good news about global recovery and demand is picking up in certain segments of the Indian economy.

How do you see this?

In the last few weeks, we have seen some demand in the domestic economy in select sectors, including real estate and automobiles. However, it is too weak and too recent for us to conclude with confidence that these sectors are now reviving on a sustainable basis. The issue of demand is also very crucial as exports are down since global economies are under severe strain. These economies will take a very long time to come out of the downturn. The growth of Indian exports would remain a challenge for a very long time to come. Fortunately due to good performance of corporate India in the last 5-6 years, balance sheets of companies were in a good shape when the downturn started in the country.

The response of corporate India to the downturn in the economy was also very swift. Many companies immediately announced production cuts as soon as the downturn in the economy began to take effect. We are likely to see more difficult times in our economy as the country is expected to post 5%-6% GDP growth in the immediate future.

What really caused this situation in Indian economy : the global downturn or the tight monetary policy followed by RBI?

The slowdown in our economy mainly started due to our close integration with the global economy. We, in India, thus also saw the rub-off effect of the liquidity crunch in the global market. It shook people?s confidence and affected consumer spending. High interest rates were thus not the prime cause of downturn in our economy in the recent past. At present many companies in sectors like pharma and real estate have run into balance-sheet difficulties due to various reasons like forex derivative transactions and acquisition debt funding obligations.

Are Indian banks in a position to fund higher growth?

Indian Inc currently depends solely upon on public sector banks to meet its funding obligations. All other sources of funding for corporates till a few weeks ago had been completely shut down. So, the question is: Can the Indian banking system sustain even with the 15%-16% credit growth as predicted by Crisil? Is it enough to drive our 6% GDP growth? The upturn in lending will be led by the state-owned, and not private or foreign, banks in India.

NBFCs and mutual funds too are shrinking as far as funding options are concerned. However, banks today are concerned about their asset qualities and also have a sharp eye on their bottomlines.

What about the NPA scenario?

Crisil?s projection on asset quality is that the gross NPAs in the Indian banking system will go from 2.3% as on March 2008, to 5% by March 2011. The absolute quantum of NPAs will go up by three times from the current NPA level, to Rs 2 lakh crore by the year 2011. Currently, the total credit of the Indian banking system is Rs 27 lakh crore and we are projecting the maximum increase in NPAs to come from the corporate sector.

The biggest increase in NPAs will happen in most vulnerable sectors like real estate and textiles, as 17% of the total credit growth has gone to these sectors. Around 78% has gone to medium-risk sectors and 5% to low-risk sectors. Corporate NPAs will thus go from 1.6% to 4.1% by 2011.

Retail NPAs will go up from 3.2% to 4.7% by 2011. Agri NPAs will go from 3.2% to 6.1%. SSI NPAs will grow from 3.1% to 10% by March 2011. The biggest contributor to the NPAs would thus be the corporate, and not the retail sector, in the years to come.

This is because most banks have closed down their personal loans business. And housing loans form more than 50% share of the total retail portfolio of the Indian banking system.

In India, due to social as well as emotional reasons, people usually do not default on housing loans.

What will be its impact on the performance of banks and interest rates ? Also, do you think the new government should go for a third stimulus package?

Fortunately, the capital levels of Indian banks are very strong now. Capital-to-gross NPA is five times coverage as-on-today in the Indian banking system. Thus a systemic risk of a bank blow-up in India is ruled out completely. However, the profitability of Indian banking system will get affected. At 12%, our fiscal deficit is at absolute levels today. We cannot afford the current fiscal deficit level to go up further. As far as interest rates are concerned, the government?s borrowing program will put pressure on the interest rates in the system to go upwards. That will balance the downward pressure of interest rate-cuts. It will be very difficult for the rates to go down significantly hence. It?s our forecast. My take is that 10-year G-Sec would be range-bound between 6.5%-7.5%.

A third stimulus package by the government in the near future is not a possibility, as we need to give a reasonable amount of time for the announced packages to get absorbed into the system. A third package, if announced, will affect fiscal deficit too. The government now will now focus on completion of pending infrastructure projects.

What are the stressed sectors today?

The most stressed sectors in the Indian economy today are real estate, textiles, gems & jewelry, chemical and auto ancillaries. The least stressed sectors include pharmaceuticals, healthcare, power, FMCJ and telecom. The lesser stressed sector would include banking.

Can we return to the growth trajectory in the near future?

In the current fiscal, India?s GDP will grow at 6%. We have not bottomed out, although the extreme stress is over. More foreign money will flow into the country through the FII route, post the Lok Sabha election results. However, FDI inflow into India would be relatively slower. The rupee would go back to its normal course of appreciating against foreign currencies. It?s again a problem for Indian exporters. The current fiscal would turn out to be a difficult year for Indian companies. The first kick towards the next phase of investments in the current financial year would come from the government?s side, while promoting core infrastructure projects. Private players would thereafter follow the governmental action.

India can go back to 9% growth only when the economy picks-up to 2%-3% growth rate in the western world. Nobody knows when that would happen. New capex announcements would happen after few months and the IPO market in India could revive. Demand in the gem & jewelry sector could go down by 50%-55% in the current year. The textile sector would continue to remain under stress and inflation would remain at acceptable levels. Cost of funds for banks in India would not decline substantially. We are amidst an unprecedented downturn and so, we will not bounce back soon. However, we will pick up faster when the global economy shows signs of revival.

What are three key factors you would track to see improvement in the Indian economy?

To conclude, let me say that we at Crisil would continue to track funding cost and availability of money, domestic and export demand, and currency fluctuations. These factors would determine the outlook of the economy.