The sentiments in the market remain buoyant in line with global optimism. In between the bull run, bankers and credit rating agencies are raising a few red flags. These issues, if not addressed, could slump the market back from where it had started to rise.
The free-wheeling market continues as the market reaches within a striking distance of 11,000. The juggernaut is particularly baffling considering the stark difference between the reality of the economy and sentiments in the market.
India now has the third-highest number of Covid-19 cases but the market doesn't seem to believe that the lockdown could be reimposed again. It continues to roll along the global markets on the dose of high liquidity, waiting to be deployed.
Though the economy is opening up, the banks are foreseeing rising cases of NPAs.They are rightly opting for raising fresh capital to deal with the possible need of increasing provisions.
Among the larger banks, SBI and HDFC Bank and Axis Bank have already announced capital raising plans. ICICI Bank is also mulling its options in this direction. The finance ministry is also likely to assess the capital requirement of public sector banks after the September quarter once there is greater clarity about a spike in bad loans.
The red flag:
Credit rating agencies have also served up a red flag for an impending non-performing assets crisis. The agencies may withdraw their ratings in cases where the issuer is not cooperating and providing them enough information to make an assessment.
In a document submitted to the Reserve Bank of India, the credit raters have stated that at the end of March 2020, around 47% of the issuers are not cooperating with raters compared to 22% two years earlier.
While banks are gearing up to tackle the need for rising provisioning, credit rating agencies have also served a reminder on the impending NPA crisis.
Current ratings are not reliable by the own admission of the rating agencies. The ratings are carried on the face value of an institution rather than up-to-date information. It creates a great void for an investor who lacks a concrete evaluation parameter to judge the real strength of the financial institutions.
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