Edward Altman, who developed the Z-score method for predicting bankruptcies, says India needs a good credit culture as China made a mistake of lending indiscriminately to spur growth.
According to Altman, who is the professor finance emeritus at New York University’s Stern School of Business, non-performing loans (NPL) in the Indian banking industry needs to be reduced.
Talking on Indian firms, he said Z-score indicators could have predicted bankruptcy of 10 companies earlier.
"We are in the longest benign cycle in modern financial history, mainly the United States. We are in the ninth year and the longest before that was seven years," Altman said.
"I define benign cycle as low default rates, high liquidity, low interest rates and spreads over the government rate charged to lenders and borrowers. If all of those four ingredients are here, then you are in a benign cycle and we are still in it," he added, "Probably the benign cycle would continue for another 12 months at least."
"If we have a recession, then there would be tremendous impact on defaults and the size of companies that default would be more than we thought because of the incredible build up in global debt in last nine years, Altman said.
On the Z-score, he said, "It's a conceptual model that is empirically based and accuracy has been close to 90 percent within two-years of bankruptcy, but it is mainly tested in the US."