Indian corporates, already under stress from a slowing economy, cannot afford a credit ratings cut, which would raise their borrowing costs, further hurting profitability, Chanda Kochhar, CEO of the country’s second-largest lender ICICI Bank told CNBC.
The government’s inability to attract investment has seen Asia’s third-largest economy grow at its slowest pace in 9 years in the March quarter, and ratings agencies Fitch and Standard & Poor’s have already cut the country’s credit outlook to negative from stable.
S&P also said in June that India could be the first among the so-called BRIC (Brazil, Russia, India and China) group of economies to lose its investment-grade status on slowing growth and roadblocks to policy-making.
“I think the bigger impact of something like this (a rating cut) is the sheer ability of India to raise funds which include banks like us, which includes the corporate sector…it just becomes that much more expensive, so the next round of funding would come at much higher rates,” Kochhar told CNBC in an interview.
She added that while costs were going up for Indian firms, profits were declining because of overall sluggish growth.
Big domestic firms including Indian Cement, Bharti Airtel and Tata Motors have reported profits for the June quarter that either missed expectations or plunged from a year earlier. Ranbaxy Laboratories, the country’s top drug maker by sales, made a loss as foreign exchange losses ballooned despite a surge in sales.
“If you look a little bit at the performance of corporates, while sales and revenues are still continuing to go up, the profit levels are coming down. So cost of operations which also includes cost of power and many other costs are going up,” Kochhar said.
“It may not necessarily lead to those companies becoming NPLs (non-performing loans) for banks but yes, it does compress cash flows so it does have an impact,” she added.
However, ICICI, the country’s largest private lender, is still seeing robust loan growth and said in July that profit for the June quarter jumped 36 percent from a year earlier.
Companies with “strong liquidity” like ICICI should be able to weather any impact on profitability should a ratings cut happen and cost of borrowing goes up, Kochhar said.
She added that the Indian government has to kick-start the economy by fast tracking infrastructure projects, removing investor doubts regarding taxation rules and getting its fiscal house in order.
- Written by CNBC's Jean Chua. Reporting by Anchor Lisa Oake.