Standard & Poor’s (S&P), a leading international rating agency, has recently brought down the credit rating of India from BBB+, which can be considered as a stable ranking, to BBB- and has also given a negative rating. It is expected that this will serve as a major warning for the national government and make sure that it takes some steps to address the macroeconomic problems.
Takahira Ogawa, a credit analyst with S&P, has provided the reasons for demoting the sovereign rating prospects of India to a status that is just above the junk bond status. Ogawa states that the revised outlook means that there is approximately 33 percent chance that India’s position can be further downgraded if the following situations persist:
- deterioration of external economic condition
- slow progress in fiscal reforms
- lessening in growth prospects
It has also been stated that the chances of India being downgraded are more than ever before. In addition, S&P has also reduced the rating prospects of 10 leading Indian banks such as State Bank of India, HDFC Bank, and ICICI Bank. Other banks that are also set to be affected in this regard are:
- Axis Bank
- Indian Bank
- Bank of India
- Syndicate Bank
- IDBI Bank
- Union Bank of India
- Indian Overseas Bank
Credit Rating by Moody's
Moody’s, a leading credit rating agency has placed Life Insurance Corporation (LIC) as well as three of the largest private sector banks – ICICI Bank, Axis Bank, and HDFC Bank – on the list for a future downgrade. It is expected that these 3 banks will be reviewed in the coming quarter.
The step taken by Moody’s follows the similar decision taken by Standard & Poor’s. Financial analysts are however of the opinion that investors and depositors need not press the panic button yet.
Dinesh Shukla, who operates as a banking analyst for Sharekhan, a brokerage firm, has stated that the announcements made by Moody’s will not have any bearing on the money of the depositors as their financial condition is supposed to be sound right now.
He states it is evident from the latest quarterly financial statistics of the above-mentioned banks that they are on the road to growth, further adding that these banks will not be facing any major financial problems in the near future.
The LIC has recently helped the Indian government by helping it with the sale of its 5 percent shares in the ONGC. This could have led to it being placed on Moody’s review list for a future downgrade. Moody’s has recently stated that the LIC’s exposure to the public sector banks has been increasing through equity investment.
Credit Rating by Fitch
The latest Fitch ratings have made it clear that lenders in India need to generate 50 billion dollars in order to add to their present level of earnings so that they can satisfy the Basel III requirements that are going to be implemented by the Reserve Bank of India in the future.
In a statement, Fitch has stated that at least 3/4th of the money will have to be generated in the 2 year period starting from April 1, 2016 as per the fresh guidelines that have been issued on May 2, 2012 by the apex banking body in India. The banks have to obey the rules and regulations by March 2019.
At the moment the Indian banks are facing a lot of pressure owing to unrealized loans and declining economic growth but they will also have to generate new funds. The biggest bank of India, the State Bank of India, is expected to be hampered by the greater capital requirement. It also holds a major share of the banking system of India.
The smaller public banks, which find it harder to generate funds, will also find it hard to satisfy the capital requirements according to Ananda Bhoumik, the senior director of Fitch. She has stated that the equity Tier 1 ratio for several Indian banks is approximately 8% or greater and revealed that the instant impact of the Basel III regime will be a benign one.
Fitch also states that the bigger private banks will face less trouble in this regard as their capital ratios and profits are higher. The government is expected to invest almost $20 million so that their majority shares can be maintained.
The head of the Indian Banks Association and Chairman of Bank of Baroda, MD Mallya has stated that they are not expecting much difficulty with regards to capital generation for meeting the Basel regulations. He has also stated that Indian lenders are in far better position than their global counterparts and can easily fulfill the requirements.
India’s Credit Rating in comparison to other Asian countries
Standard and Poor’s Ratings
India’s Credit Rating by S&P and its Implications
It is expected that the Indian companies will now find it harder to borrow and the foreign direct investments in India are expected to go down as well. The Union Finance Minister, Pranab Mukherjee, has however stated that the situation is yet to reach the level where the different stakeholders might need to panic. He has stated that it is only a warning.
Mukherjee has stated that at the end of the present fiscal, Indian economy will grow by 7 percent and expressed confidence that the fiscal deficit will be kept to 5.1 percent or lesser. The finance minister has further stated that the government is now aware of the situation and will work dedicatedly to achieve better growth.
The downgrade is expected to make loans harder to come by for the Indian companies – debt refinancing could become tougher as well. Experts are also saying that international investors will now be less confident about India now.
On its part the ratings agency feels India’s GDP will grow by only 5.3% at the end of 2012-13 fiscal and also feels that the pace of economic reforms will not be as per expectations. It is being assumed that Indian organizations will find it hard to deal in international currencies.
The state owned organizations will be affected the most as a result of the situation because of their links with the financial condition of the government. Sarah Hewin from Standard Chartered has stated that the decision does not come as a surprise. She states that in the initial stages the effects of the situation on the Indian currency will not be felt that much but as the flow of portfolio gets stifled in the days to come, greater pressure will be felt.
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Last Updated on 5/9/2012