Approach to Building Early Warning Signals (EWS) Framework Considering Market Specific Antecedents for Indian Corporate Credit Defaults

Several defaults in Indian markets between 2018 and 2021 have been high-impact defaults that caused significant damage to financial wealth and businesses built over many years as well as damage to investor trust and confidence. Some of the defaulters have been highly rated issuers and credible institutions. With their downfall came the ripple effect of liquidity constraints, cautious disbursements and a pessimistic lending sentiment. The genesis of this study emanates from these defaults, in particular from the surprise element in the defaults and the (in) effectiveness of the current early warning signal frameworks. The warning signal frameworks in place could not trigger timely alerts that could prompt adequate interventions to minimize the damage. One such default incident was that of Infrastructure Leasing & Financial Services (IL & FS) which experienced its first default in September 2018 followed by a series of defaults that ultimately led to its collapse. Other issuers followed suit in subsequent months and the Indian credit markets witnessed a difficult period, placing an estimate of exposure at stake for credit defaults that occurred between 2018 and 2021 at more than INR 150,000 crores. It is to be noted that the exposure was spread over different categories of lenders and included smaller retail investors as well. The problem remains relevant and is a critical area of interest for regulators, intermediaries such as rating agencies as well as institutional lenders. The risk–reward models missed interventions that could have pre-empted the damage. Subsequently, regulators have made efforts to introduce triggers and safety mechanism measures in the monitoring within these early warning signal frameworks. Over time, the market should start seeing the effects of the new measures that have been rolled out.