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Rated Indian finance Great asset quality but low profitability for companies in emerging markets: Moody's
Indian finance companies rated by it have relatively good and stable asset-quality metrics as compared to other rated entities in the six emerging markets, said Moody's Investors Service.
In a report about Moody's rated finance companies in six emerging markets the credit rating agency said Indian companies have good and stable asset-quality metrics owing to well-established track records in lending to specific industries such as consumer loans secured by gold goods as collateral (gold loans), the government's power and infrastructure sectors, and residential mortgages.
Indian entities' de-risking will also support improvements in asset quality into 2023, the report notes. Further, Indian companies have high exposure to secured debt while other regions have access to unsecured funding. On average, secured funding reliance is low and has fallen in most regions, a positive credit driver.
In India, secured debt represents more than 50 per cent of tangible managed assets, high compared to global averages, except for government entities such as Power Finance Corporation, which owns REC Limited, and Housing and Urban Development Corp Ltd, which on average have much lower secured debt levels at just below the global average, at 16 per cent in 2021.
Secured debt is above the average of the cohort because of market practices that result in most local bank borrowings and domestic bond issuances being secured. Indian finance companies maintain ample access to bank and non-bank funding sources and liquid loan exposures, Moody's said. Secured debt could serve to boost liquidity for companies with good loan quality.
The profitability of Indian companies is just below average, though they benefit from low operating and loan-loss provision expenses; many are financial arms of the Government of India for lending in key sectors of the economy, the report said.
These entities have slim margins when compared to peers in emerging markets, but also low provision expenses that are below the emerging markets average because they mainly focus on corporate loans.
Nonetheless, the profitability of Indian entities is held back by low contributions from non-interest income, which is less than 10 per cent of total revenue, among the lowest levels in the emerging markets.
Operating costs are lowest among Indian finance companies, as many maintain small operating setups as a result of their links to the government, such as PFC, but also because of private companies with ample revenue such as Muthoot Finance Limited, whose margins are ample based on gold loans.
Although finance companies in India and China usually have the lowest capitalization metrics among the emerging markets, the risks are counterbalanced by government and parental links that reduce default risks as reflected on the support assumptions incorporated on their final ratings, Moody's said.
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