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MUMBAI: The recent credit crisis has thrown up learning lessons for all stakeholders — be it fund houses, investors, distributors or credit agencies.
“In the last 18 months, most of the credit defaults we have seen are not because of business reasons, but more due to governance.
Mutual funds got to understand and became careful about concentration risk,” said Ashwani Bhatia, MD and CEO at SBI Mutual Fund, adding that debt risk has become more like equity risk.
“I think it is back to basics -- look at model, management and cash flows, you don't know where the risk is going to come from,” he said at the CII Mutual Fund Summit.
The more than 18-month-old credit crisis began with IL-FS’ default in late 2018, and has hindered recovery in an economy grappling with slowing economic growth.
It has impacted the mutual fund industry and investors along with various stakeholders, who largely believed that with debt investments, they were resorting to safety.
From the distributor perspective, Vijay Chandok, MD and CEO ICICI Securities stressed that the factor of responsibly selecting what to offer and whom to offer is very important.
Vishal Kapoor, CEO, IDFC Asset Management pointed that the core of investors' risk profile is a bucket that is closer to fixed deposits.
“What we shouldn't do is, if we take credit risk, we can't expect that it will come without any risk,” added Kapoor.
One has to be educated about the credit default risk, even if the paper was top rated, was the common tone.
“There is no free lunch,” quipped session moderator Mayank Jha, Partner and Managing Director at Boston Consulting Group.
Kapoor pointed out that a retail investor goes by what he has seen in the past, and one doesn't even imagine that there could be a credit risk that can lead to erosion of capital.
“Over time, he will understand that if there is a credit product, there could be a risk of default,” added Kapoor.
From a credit ratings agency’s viewpoint, Somasekhar Vemuri, Senior Director at Crisil said, it was important that they build in some degree of stress in their analysts to see how company’s perform in such times, but it was not always possible to spot the red flags, more specifically if there is a fraud involved.
“In terms of fraud, what we can do is limited, but we can try and enhance our market intelligence as these kinds of things are difficult to hide for too long,” Vemuri said.
“Ratings agencies are not infallible,” he added.
It has been a learning curve for the industry along with a brutal reality check as well.
“The industry has evolved over time, they have made mistakes,” said Lakshmi Iyer, CIO-fixed income - head-products Kotak Mahindra Asset Management.
“It is important that we need to be aware that this industry needs to grow.
Let's not get carried away by what has happened in the last 12-18 months,” she added.
