Monitoring Corporate Health

Indicators to monitor the pulse of India Inc and financial markets to help in corporate decision-making and policy interventions

As the world is fighting the COVID-19 pandemic, how to rejuvenate the economy is a major concern. India Inc. will have to play a crucial role in recovery. The governments – state as well as central – will have to intervene, provide the necessary stimulus as well as introduce key reforms. A data-driven policy is critical in aiding the recovery. We will aim to create datasets, significant indices, and visualizations to track the pulse of Corporate India and financial markets and help evaluate policies. Practitioners, policymakers, journalists, and common people can use a “Corporate Health Tracker” to understand how the recovery is progressing and make necessary adjustments. A similar online resource to monitor the U.S. economy is currently being developed:

Scope of Potential Projects. To monitor multiple dimensions of business health, the Corporate Health Tracker will create a variety of indices. An indicative list includes indebtedness, profitability, sales growth, corporate governance, bank lending, non-performing assets, number of new startups, equity market risk, and investor sentiment, among other aspects. We will group these indices into a few distinct projects. The outcome of the projects can be datasets that would be made available via ISB’s India Data Portal.


Project 1 : Investor Sentiment Index using Textual Analysis and Machine Learning 

Faculty Members: Prachi Deuskar and Sudhir Voleti 

Project Brief : Stock markets around the world have experienced wild movements in recent times. How much of that movement is driven by economic realities, and how much by investor psychology? It is well-known that investor sentiment plays a crucial role in financial markets. When a large set of investors move based on optimism or pessimism unfounded in reality, stock market prices can fluctuate. This can lead to misallocation of capital in the economy. Too much money gets allocated to unproductive pursuits when investors are exuberant. And even excellent business opportunities may be starved of resources during times of panic.  

As intuitive as this concept is, measuring investor sentiment is hard. But whether investors are optimistic or pessimistic, the financial press reflects that tone. Idea is to explore how to create an investor sentiment index for the Indian stock market using textual analysis of news articles and machine learning. 

The team will create an initial corpus of news articles scored of different dimensions. This corpus will then be used to train the machine learning algorithm to produce an investor sentiment index. The team will perform qualitative and quantitative validation exercises to see how the index correlates with past and future stock market movements and other indicators of investor irrationality

Project 2 : Corporate Credit Quality Index (CCQI)

Faculty Members: Prof. Apoorva Javadekar & Prof. Prasanna Tantri

Project Brief : Indian banking system underwent a period of rapid credit growth after the global financial crises of 2008-09. Unfortunately, a large part of the credit went to unproductive/inefficient firms. Initial Findings show that only 10% of the credit in the economy is with the firms who have Interest coverage ratio (ICR) of greater than 1. (essentially, companies who make enough to at least pay interest on loans) That means 90% of the credit is mis-allocated. Banks managed to keep the lid on the disclosed levels of Non-Performing Assets (NPA’s) by funding companies with more credit when they could not repay the original borrowings – the so-called zombie lending. In 2014, the RBI initiated Asset Quality Review (AQR) and the new government cracked down on zombie lending, did banks start to fully disclose the extent of the NPA’s – the result was horrific – Indian banking system had developed stress to the extent that 10% of the loans were categorized as NPA’s and another 15% were on their way to default with gross NPA’s standing at around INR10 Lakh Cr at its peak.  

It is of utmost importance to develop a tool to track these cracks in the quality of the corporate credit very early and respond swiftly.  We do not have a good index of quality of corporate credit.  We will pick data from the financial statements of the corporates – large corporates disclose financials every quarter and smaller firms disclose it every year. Then use this data and compute simple yet useful quantities such as “which companies are holding on to the banking credit”, “did better or worse firms secured fresh credit during this quarter”, “is the problem more severe for the firms mainly funded by Public banks”?  This would give a real-time index of corporate credit quality. In the second wave, we aim to extend this to other developing and developed markets using COMPUSTAT Global database. This index will be on the dashboard of the Center for Analytical Finance. 

Project 3: Impact of Macro-Political Events on the Indian Mutual Fund Industry

Faculty Members: Prof. Nitin Kumar

Project Brief : Corporate Health of an economy is reflected in the financial markets. Mutual funds (MF) are an investment vehicle through which common people in the economy participate in the financial markets. Yet, despite the tremendous growth in the MF industry in recent years, there have been events of macro-political nature that impacted (positively or negatively) the growth trajectory of MF investments. The most recent such macro event is the economy-wide disruption due to Covid-19. 

The goal here is to quantify the impact of such events on the MF industry. We will analyze the impact of three such events: (a) change of government at the central level because of elections, (b) 2008 financial crisis, and (c) Covid-19. The team will create a database of MF investments using various sources (open source or subscriptions available at ISB) in a broad category of mutual funds, such as equity- or debt-oriented funds. The data shall be then analyzed to quantify the impact of the events mentioned above on mutual fund investments. 

The team will create a database of MF investments using various sources (open source or subscriptions available at ISB) in a broad category of mutual funds, such as equity- or debt-oriented funds. We will then analyze and quantify the impact of the events mentioned above on mutual fund investments. 

Project 4Explore ways to conceptualize a Corporate Vulnerability Index 

Faculty: Shashwat Alok & Prachi Deuskar 

Project Brief : Covid-19 has had India under lockdown for months now. While essential services have been allowed to operate, but with reduced workforce and proper precautions in place, other businesses and services have been forced to either have employees work from home or shut down completely for the time being. While all businesses are affected by the pandemic, some have suffered more than others. For example, look at the stock price performance of TCS vs Tata Motors: 

Source : Date: May 28, 2020 

What makes some businesses more vulnerable to the pandemic than others? To this end, we want to conceptualize a “Corporate Vulnerability Index”, a metric to gauge exposure of a business to potential impact from pandemics and other calamities. 

The team will first identify the key dimensions along with vulnerability needs to be measured: for example, demand, human resources, supply chain. They will think about the best ways to measure exposure to risk for each aspect. The idea is to combine vulnerability along different dimensions into one index. The team will operationalize the index using a few companies with a plan to eventually scale the measurement across a broad range of corporates constituting a representative sample of India Inc.