With the global credit crisis intensifying, many global financial institutions (GFIs) face increasing pressure on their earnings and capitalisation, and therefore on their credit quality. Pawan Agrawal, director, corporate & government ratings, Crisil, talks about the impact of these developments on the ratings of these institutions’ Indian subsidiaries. Excerpts:
How does Crisil factor in parent support for arriving at the ratings of Indian subsidiaries of GFIs?
Crisil’s ratings for Indian financial sector entities with global parentage incorporate an estimate of the likelihood that the Indian entities will receive business and financial support from the respective parents in the event of distress. This estimate is based on Crisil’s assessment of the economic and strategic importance of the Indian operations for the GFIs and the moral obligation on the GFIs to extend support to the Indian subsidiaries.
To arrive at its ratings, Crisil first assesses the standalone credit quality of the subsidiary, then evaluates the parent’s credit profile (including by translating its global credit rating assigned by Standard & Poor’s on to the Crisil rating scale), and finally estimates the likelihood of support being available to the subsidiary in the event of distress.
The standalone ratings of most of the subsidiaries being relatively low, the final ratings have so far been strongly influenced by the credit quality of the respective global parents.
Does the difficult operating environment for non-banking financial companies (NBFCs) affect the economic and strategic importance of Indian operations?
Given the increasingly challenging operating environment for NBFCs in India, Crisil believes that the economic benefit from Indian subsidiaries, and the strategic importance of these subsidiaries, has diminished over the years.
Over the medium term, Indian subsidiaries will find it difficult to meet their parents’ economic return expectations, especially with the enhanced regulatory capital adequacy requirements in India which could further dilute the economic incentive for some GFIs to support their Indian subsidiaries.
If the economic incentive to support the subsidiaries is reducing, what supports the ratings now?
The GFIs’ strong and continuing moral obligation to support their Indian subsidiaries is what underpins most of these subsidiaries’ ratings today.
So far, the expectation of such continued support on account of moral obligation from global parents has offset the weakening standalone credit profiles of Indian entities, and their diminishing strategic and economic importance for their parents. However, in the context of the escalating global financial crisis and its impact on the viability of some GFIs, moral obligation alone may no longer be sufficient for Crisil to hold ratings at current levels. Crisil could question the fundamental assumptions on the continuation of support, as the cost of support increases and the GFIs’ ability to provide it diminishes.
Will Indian debt investors be affected if global parents decide to exit India?
Crisil expects parent GFIs that choose to exit India to do so in an orderly manner, ensuring full and timely repayment of all debt obligations of their Indian subsidiaries. Our ratings strongly factor in this expectation.
What can we expect from Crisil over the coming months?
Crisil will continue to assess the implications of emerging factors that can influence the continuation of support from GFIs. Specific indicators that we will monitor are: Evidence of restructuring of GFIs’ global operations, indicating diminished inclination to support Indian operations; government influence that may restrict GFIs’ support to their global subsidiaries; and increasing losses or need for additional capital for Indian subsidiaries, indicating an increase in the expected cost of support.
Crisil’s observations and expectations regarding these can result in changes in the ratings on the Indian subsidiaries. The extent of the changes will depend on the distance between the subsidiaries’ outstanding ratings after factoring in GFI support, and their standalone credit quality without any support being factored in. Further, over the near to medium term, Crisil’s ratings on the Indian subsidiaries of GFIs might be volatile compared with those on its other rated entities.
