Nothing creditable

The performance of the credit rating agencies seems to be getting worse day by day. The country's top rating agency, Crisil, has downgraded...

The performance of the credit rating agencies seems to be getting worse day by day. The country8217;s top rating agency, Crisil, has downgraded ITC Classic Finance8217;s non-convertible debenture and fixed deposit schemes 8212; they are now classified as having 8220;inadequate safety8221; 8212; on the same day the company posted huge losses which have nearly wiped out its entire net worth. That is really poor showing for a credit rating agency which is supposed to provide advance information on a company8217;s viability to guide the investor. To be fair to Crisil, it had placed ITC Classic on a 8220;rating watch8221; even prior to the actual downgrading, but the fact of the matter is that it did not come out with its revised rating at the time when it could have actually been useful to the investors. Nor is this the first time that such a situation has arisen. Most investors would recall that, less than a year ago, Crisil was forced to downgrade its rating of Mideast Shoes from 8220;AA8221; to 8220;D8221; or default grade, for much the same reason.

In this case, Press reports began surfacing on how the company was defaulting on loan repayments.A similar lapse on the part of an yet another credit rating agency IDBI8217;s subsidiary CARE was noticeable in the case of the CRB scam, which is still fresh in the minds of investors. CARE, it will be recalled, gave CRB Caps a 8220;A8221; rating, and downgraded this only after it became clear to all that the company was in serious financial trouble. CRB8217;s marketing hype and CARE8217;s stamp of approval, meanwhile, ensured that thousands of gullible investors lost their money.

While it is true that the individual credit rating agencies were at fault in these cases, the genesis of the problem lies elsewhere. It lies in the fact that corporates are not forced to disclose the rating that they are given by the credit rating agency they go to. Which means that if they do not agree with one agency8217;s rating, all they have to do is to go to any one of the other three rating agencies in the country. In fact, in the case of CRB Caps, both Crisil and ICRA rated it as a speculative investment. It was after this that CRB Caps went to CARE and, as is obvious now, struck gold. It is believed that close to a third of the ratings done by these agencies are not accepted by their clients.

Thus, while Crisil has rated 2,011 instruments of companies till date, the clients have accepted and subsequently published 8212; only 1,359 of these. ICRA has done 1,070 ratings and 690 of them have been accepted. A total of 167 of CARE8217;s 484 ratings have not been accepted by its clients. So, theoretically speaking, it8217;s possible that a third of the companies which have raised deposits from the public have been rated as speculative by at least one of these agencies. To begin with, the government would do well to make it compulsory that each company declare each and every rating it has got from credit rating agencies.