India’s liquidity crunch could ensue for months, says S&P

SINGAPORE - Rated Indian companies are relatively well-positioned to withstand the stress in India's debt capital
markets since a major default, says S&P Global Ratings in a report published today.

"India's financial markets are facing a trust deficit," said S&P Global Ratings credit analyst Geeta Chugh. "The disruption could put a strain on weaker companies as well as finance companies."

 Spreads have widened, and short-term borrowing costs have spiked since Infrastructure Leasing & Financial Services Ltd. (IL&FS) - an infrastructure development and finance company with a high domestic rating - failed to meet local-currency debt obligations in August and September.

 Corporate governance concerns are adding to risk aversion, says S&P.

 "While liquidity stress has begun to gradually ease, we expect tougher conditions could linger for months.

 "Indian companies including nonbank finance companies (NBFCs) are vulnerable to spiking interest rates because they have increased reliance on short-term debt, after years of relatively good financing conditions for shorter-dated paper."
 
S&P says rated Indian companies are better-positioned because they tend to have manageable short-term obligations and good liquidity.
 
"A large proportion of borrowers in our rated universe has less than 20% of their borrowings coming due in the next 12 months.
 
"Also, many of the companies with a higher share of borrowings due in the next 12 months either have high cash balances, or very low leverage."
 
Nevertheless, says S&P, costlier or restricted financing could delay some growth plans -- and hurt profitability.  
 
Bank asset quality could come also under pressure because of the IL&FS default.
 
"On the other hand, banks will benefit from more risk-based pricing and reduced competitive intensity," S&P says.
 
IL&FS is one of India's leading infrastructure development and finance companies, was highly rated domestically, and has institutional shareholders including the State Bank of India and Life Insurance Corp. of India.
 
Its default has disrupted debt capital markets, and led to particular concerns on NBFCs, says S&P.
 
"NBFCs and housing finance companies are the most exposed to liquidity challenges because they borrow heavily from mutual funds and have significant reliance on short-term borrowings," said S&P Global Ratings credit analyst , Deepali Seth-Chhabria.
 
"Top-tier Indian retail finance companies are better placed to withstand the liquidity stress. These companies have low reported non-performing loans, and good earnings and capital."  www.standardandpoors.com (ATI).