Indian corporate cycle ticking; default rates may rise: Barclays

After achieving robust financial health in the 90s, the credit quality improvement of Indian companies is showing signs of slowing down and default rates could rise in the future, according to a senior Barclays Capital executive.

An analysis of Indian corporate paper (bonds) by Crisil shows that default rates were the highest in 1998-99 and have come down to the lowest level now.

The growth in the Indian economy from 2000 onwards has led to better cash flows, unlike growth without earnings seen in 90s, Barclays Capital director How-Chih Lee said in an address at IBA-FICCI.

The credit cycle in India is ticking, but the pace of improvement will not be as fast as seen in the past. The defaults have a tendency to increase when the economy goes into slow gear. This could happen in the future, but one does not know the time, he said.

Referring to the perception about Indian paper floated aboard, Lee said the spreads on derivatives on the Indian corporate bonds have come down from their peak levels as the market realises the robustness of Indian economy.

The general risk taking capability has declined as a result of the herd mentality following the US sub-prime crisis. But investors and bankers are now realising that the US home loan market crisis cannot impact the Indian economy. It is driven more by the Reserve Bank of India's monetary policy and interest rate trends, Lee said.

The demand for foreign currency convertible bonds (FCCBs), quasi-equity instruments, is still good. Indian companies have raised USD 8-10 billion through such instruments since 2004, he added.