Early recognition of a problem increases one’s chance of success in resolving it. For that early recognition to happen, we must be looking at the right indicator. We can’t use an equity market indicator (only) or a macro-economic indicator (only) to look for the problems related to your lending portfolio’s credit quality.
Amukha’s Credit Sentiment Index (CSI) is a specially built indicator to track the credit quality of your portfolio. Moreover, its wider coverage means you can always compare your portfolio’s credit quality vis-a-vis the broader market.
Amukha has constructed CSI for the top 100 listed companies by the amount of total debt, constituting 20% of overall bank credit. The recent readings showed a decline in credit risk for the top 100 high debt companies in the December 2020 quarter. Earlier, the CSI readings for June and September 2020 quarters showed a rise in credit risk due to the impact of the COVID-19 lockdown.
Credit Sentiment Score (CSS), the building block of CSI, is a credit quality indicator for individual accounts. Our hypothesis is that the CSS can act as an early warning indicator for identifying companies with pre-default behavior. To validate the hypothesis, we have analyzed the 40 companies that have declared a default on loan interest and/ or principal repayment in 2020. Our analysis has shown a marked increase in CSS for these 40 companies in the years before loan default in 2020. Here, we have highlighted ten such companies:
The best way to understand the use case of CSS is through an example.
Case study: Jet Airways
Once India’s largest airline by passenger numbers, Jet Airways went into financial trouble in 2018 that ignited bankruptcy fears. The airline halted operations in Apr ’19, and it was declared bankrupt after a couple of months. It was one of India’s largest bankruptcies.
The 50-day moving average of CSS for Jet Airways started moving up as early as Oct ’17. It jumped from 0.8 in Oct ’17 to 14.4 in Jan ’18, nearly nine months ahead of bankruptcy buzz. CSS had indicated a rise in credit risk for Jet Airways between Dec ’17 and Jan’18, at a time when the company’s share price was at a multi-year high.
Both CSI and CSS can significantly reduce the time spent on portfolio monitoring and company research activities by the credit/ risk management teams at the banks. Most importantly, these two credit quality indicators can also help in identifying distressed companies or sectors ahead of time.
To know more about Amukha’s Risk Management Solutions, email us at info@amukha.com.
AMUKHA 