Risk Analytics Platform
Promoter ownership data is an important piece of information that can be consumed in risk assessment of corporate borrowers. This is because steep fall in promoter ownership could mean low confidence of promoters in their own company. Moreover, promoter equity dilution may also invite a change in management.
Our hypothesis is that promoter ownership related red flags such as a significant drop in promoter shareholding can act as a leading indicator to the deterioration in the company’s financial performance.
To test this hypothesis, we back-tested business rule output derived from FiND Credit Risk Early Warning System for all listed companies. Our back-testing has shown 298 promoter ownership related red flags for 232 companies for the March 2016 quarter.
As a next step, we have checked if there is any deterioration in the company’s performance captured by our Financial Risk score for these 232 companies over the last 2 years.
We found that: 85% of companies witnessed a deterioration in Financial Risk score in the subsequent quarters.
Indian banks tend to take on more risks during an upturn in credit growth while non-performing loans (NPLs) of private banks are more reactive to changes in interest rates, according to the recent RBI working paper. The report highlighted a one percent increase in loan growth leads to a 4.3 percent rise in NPLs over total advances (NPL ratio) in the long run.
Post demonetization of higher currency notes, banks have received whopping Rs 12.4 lakh crore in cash deposits. Some portion of these cash deposits is expected to remain with banks, which will improve liquidity in the system. It will enable banks to ease interest rates and boost lending operations.