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ENS ECONOMIC BUREAU
MUMBAI, June 5: Close on the heels of the recent downgrading of IFCI's long-term debt rating by ICRA, another credit rating agency -- Crisil -- has expressed its concern over the asset quality and its consequent impact on the long-term instruments floated by leading financial institutions ICICI and IDBI.
Crisil has appraised the managements of both institutions and continued to maintain the triple `A' ratings on long-term debt and `FAAA' on fixed deposit programmes for the present. In a statement here, the rating agency said it has completed the review of the outstanding ratings of ICICI and IDBI and identified the latent vulnerability in the asset portfolio.
Crisil said the basis of its concern stems from the stress caused on the institutions' asset portfolios due to the continued weaknesses in certain sectors of the industry. As a matter of fact, ICICI is the main promoter of Crisil.
``The asset quality stress has been caused by the combination of increased competition from within the domesticindustry and imports, economic slowdown, South East Asian crisis affecting commodity prices and weak investment sentiments,'' it added. The key rating sensitivities in IDBI's risk profile are the increasing asset quality risks which have led to increased NPA and decline in profitability, partially manifested in its results for financial year 1999, the agency said. In fact, both IDBI and ICICI had reported a fall in net profit for the year ended March 1999.
The three financial institutions (IDBI, ICICI and IFCI) among themselves have added a whopping Rs 4,500 crore to the NPA level during the year ended March 1999. The net profit of the three financial institutions were affected by higher NPAs this year. While IFCI's NPAs rose by Rs 2,000 crore to Rs 4,000 crore, ICICI's went up by Rs 800 crore and IDBI by Rs 1,700 crore to Rs 6,800 crore. Bankers attributed the increase in NPAs to slowdown in industrial growth, slack demand conditions, excess capacity in a number of industries, technological obsolescenceand the loss of competitiveness in some industries. They point out that companies in synthetic fibres, steel, basic chemicals, textiles and glassware sectors were in the forefront of defaulting their loan commitments.
``The increase in non-performing loans and consequent income derecognition and higher provisioning have been reported by IDBI and ICICI, which have affected the institutions' profitability,'' Crisil said. IDBI's latent problems associated with the exposures in the commodity related sectors like steel, textile, paper, chemicals and man-made fibres could aggravate in future and impact the overall risk profile, it added.
Crisil's concerns emanate more from the weakened capital structure of vulnerable entities in these sectors and their ability to service the debt obligations towards these institutions, and not so much the profitability or lack thereof of these entities. The situation has been aggravated by the difficult conditions in the primary market which has caused the vitiation of thecapital structure of the borrowers.
The Crisil observation follows the ICRA move to downgrade the medium and long-term ratings of its principal promoter Industrial Finance Corporation of India (IFCI) from LAAA and MAAA to LAA+ and MAA+. IFCI holds over 12 per cent stake in the rating agency. ICRA, in effect, downgraded the term-lending institution by one notch, from highest safety to higher safety. "Deterioration in business conditions consequent to economic slowdown has adversely affected the asset quality of IFCI," Icra had said. ICRA had said the decline in IFCI's asset quality has resulted in significant decline in its net spreads during 1998-99 and this, coupled with higher provisions required on NPAs, have adversely affected IFCI's profitability and reserves.
IDBI has recorded a 16 per cent drop in its net profit for the year ended March 31, 1999. The term lending institution has posted a net profit of Rs 1,259 crore against Rs 1,501 crore in 1997-98. Obviously, the term lending institution'smargins are under pressure from increasing financing costs and deteriorating asset quality.y
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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