Lenders hire specialist agencies to analyse default probability of borrowers

Risk-averse lenders wary of large exposures in the post-Covid era are hiring consultants and specialist agencies to analyse the default potential of all proposals in excess of Rs 500 crore.

Lenders want to ensure that they have a clear perspective of the borrower’s future default risks and cash flow situation in light of peculiar challenges brought about by the pandemic.

“The pandemic has disrupted cash flows of businesses in a significant way, and since large value loan proposals are on the rise, we thought it prudent to hire agencies and check the company’s default risk and default probability,” said a lender that has hired one such agency. “These agencies are checking the total debt, debt-service coverage ratio, cash flows and various other metrics to determine whether they will be able to service debt obligations.”

Banks want clear visibility over companies’ subsidiary operations and other activities, especially around the moratorium period. In many cases, companies are also approaching banks with expansion plans and lenders also wish to scrutinise whether firms have a clear strategy in place and what could be the macroeconomic and sectoral drivers.

“The pandemic, loan moratoriums and an uncertain business environment have led to many banks seeking clarity and additional comfort around the financial health of borrowers at the time of fresh loan proposals or renewal of facilities. There is heightened diligence, detailed financial analysis and a deeper assessment of credit risk and default around loan proposals – particularly when the amounts are Rs 500 crore and above,” said Gaganpreet Puri, leader, risk and regulatory, Alvarez & Marsal India, a turnaround specialist.

See also  The Dow snaps losing streak; NYSE to re-open

In several instances, the lenders claim that they have no visibility on operations of the companies. Many companies have seen a spurt in their valuations, especially the listed ones, but banks are concerned of the underlying assets and impact on future profitability and revenues.

“Many companies have even approached the banks as they are looking to undertake mergers and acquisitions and require financing. In these cases, banks want a rationale behind such manoeuvres,” said a person in the know.

Firms specialising in this segment say that they are being asked to give objective and automated credit analysis and rating based on the company’s financial metrics.

“AI driven automated predictive credit analysis tools are being increasingly adopted by banks and financial institutions,” said Amit Maheshwari, Strategic Advisor to FinMind – a start-up offering automated financial insights.

FinMind claims its predictive analytical capabilities enable early identification of potential credit risk events and has successfully predicted credit weakening of several companies in the past.

Bank credit growth has been languishing for the last few years. Central bank data showed that credit rose 6.61% for the fortnight ended August 13, from 6.2% in the previous fortnight. Loans to the corporate sector continued to remain weak and grew a meagre 1% during the same period.



Please enter your comment!
Please enter your name here