RBI report points to rapid ratings downgrade of corporate borrowers

Around a fourth of corporate borrowers who defaulted on loan payments to banks carried an investment-grade rating just a quarter before becoming non-performing, according to a Reserve Bank of India (RBI) report.

About 24% of the NPA exposure was sampled from the central Repository of Information on Large Credits (CRILC). The study published in RBI's latest bulletin found that these (24%) defaulters had just about managed a safe credit rating.

What this indicates is that the ratings of corporates have dropped from (at least) investment grade (BBB) to default (D) in three months. It also concluded that the ratings do not always reflect a borrower's asset quality in a timely fashion and there are also issues of delayed reporting of ratings by banks.

However, notwithstanding the constraints, the RBI report stated that the usage of external ratings in regulations is unavoidable and ways to enhance agency performance should be considered.

The study authored by Sukhbir Singh and Pallavi Chavan from RBI's department of supervision, covered 560 large borrowers, comprising around 21% of NPA borrowers and as high as 40% of NPAs as of March-end 2018.

The RBI has been maintaining a database of large borrowers' accounts that have defaulted on the CRILC since 2014. The banks have an exposure of Rs 5 crore and above to these companies.

"As a result, the possibility of under capitalisation in banks cannot be denied, given the application of the same risk weights as prescribed by the Basel Committee on Banking Supervision (BCBS). There is also some evidence on the inability of CRAs to provide timely guidance on the weakening creditworthiness of borrowers," the report added.

The RBI data also showed that the private banks were the slowest to transfer the benefits of falling interest rates to their customers in the year 2019 as against their state-run and foreign counterparts.

The lending rates (linked to the one-year marginal cost of lending rate, MCLR) between January and December 2019 for private banks dipped to a paltry 12 basis points (bps) to 9.18% as against RBI's cumulative 135bps cut in its key policy rates to 5.15%.

Majority of the bank loans are generally benchmarked to one-year MCLR, making it the most tracked rate.

Meanwhile, the public sector banks have cut one-year median MCLR by 45bps in the same period. Whereas the foreign banks lowered their one-year median MCLR by 75bps, the RBI report stated.

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