Finance companies have monopolised choicest abuses of late. But traditionally, Indian credit rating firms have given them top rating, thanks to a practice which ignores the special funding options available to them.Finance companies tend to get higher ratings compared with manufacturing companies because they are rated purely on the basis of their fund flows. Finance firms are allowed to raise debt up to 20 times their net worth. Even if leases of equipment are not repaid by companies, they can be rolled over, so that NPAs are not reflected on their balance sheets. Other "non-bank non-finance" companies normally do not have access to such high debt. The result: the funds at their disposal can never match those of finance companies. The agencies fail to examine investment patterns of the such firms in great detail. Indian rating agencies are under constant pressure to generate more business. Credit Rating & Investment Services of India Ltd (Crisil) is under pressure due to two reasons.The market leader has gone public, and needs to actively generate business. This does not imply any compromise with the quality of its rating, but the constant pressure it is under cannot be denied.Investment Information & Credit Rating Agency, the second largest credit rating body, is also under pressure to close its gap with market leader Crisil and o pen up a lead over third-placed CARE, and a distant fourth-placed newcomer Duff & Phelps India. ICRA and Crisil have 90 per cent of the market. But none of them have yet set standards in identification of bad eggs - their most important task.

There have been some unconventional ratings that have not gone down too well with either rival agencies or with those who were rated. The rating industry had objected to Crisil's use of the term Structured Obligation (SO) along with their rating. In another case, ICRA rated a state's municipal corporation higher than the state government's, inviting its ire. ICRA lowered the municipality rating in response. Sometimes the downgrading is not drastic enough -- CRB Caps FDs were downgraded by CARE from A-plus to A last year, but since the rating agency was officially reacting to an intercorporate deposits default, the downgrading should have been more drastic to D --- the default grade, point out industry sources. Clearly, the agencies do not always react to market signals. The rating agencies have not yet developed a profile such as Moody's by which they can generate business on the strength of reputation alone. Investors' have not reached a stage where they demand that a specific agency should rate their debt instruments.

Firms themselves create complications for the agencies in two ways. They initially accede to requests for information, only to withdraw into a shell once a downgrading is in the offing. Agencies are hampered by information lag and cannot proceed with downgrading. But despite good business, rating agencies have failed to generate unquestionable credibility. As competition grows, the rating agencies will have to take up a crucial role in checking on investment practices. They could start by going beyond the fund flow charts of finance companies, and identifying a few bad eggs.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.