CALCUTTA, June 9: The Unit Trust of India will soon start seeking dual ratings for fresh exposures in privately-placed debentures issued by non-banking finance companies (NBFCs). The move to stress mandates by two rating agencies, obviously prompted by the CRB fiasco, is likely to be taken up at its next investment committee meeting.

The UTI proposal, which may come into effect much before the Reserve Bank of India takes a decision on making dual ratings mandatory, will prompt most leading NBFCs to get their debt instruments rated by two agencies as other financial institutions may follow UTI's example.

Sources said the limitations of a single rating agency were highlighted in the CRB case, when CARE, the IDBI-promoted rating agency, downgraded CRB's public deposits much after the damage had been done.

At present, under the single-rating regime, corporates often go on a shopping spree to get a favourable rating for their debt instruments, as qualitative assessment takes a backseat.

According to the sources, although the UTI move will initially cover debt instruments of NBFCs, the noose is also likely to be tightened for other public deposit mobilisation by corporates as well.

Besides, dual ratings will also be advocated for debt-securitisation mop-ups where investment portfolio of NBFCs are taken off the balancesheets and placed with banks and financial institutions.

The RBI, at its last meeting with the rating agencies, had stressed on a uniform rating procedure. But this was turned down by the raters.

``A uniform procedure for rating is just not feasible since it will amount to breach of confidentiality. On the contrary, dual or multiple ratings will result in greater transparency and strengthen the due diligence exercise,'' the managing director of a rating agency told The Financial Express. The meeting had also deliberated on starting dual ratings.

Sources pointed out quite a few incidents in the recent past where rating agencies have faltered in conducting due diligence on a continuous basis and maintaining a fool-proof surveillance system. Crisil, the country's largest agency, was caught on the wrong foot as it continued to accord its highest safety rating (FAA) to Mideast Steel much after the company started defaulting on inter-corporate deposits. The downgrading followed only weeks later.

That Crisil also had to downgrade Vajaya Bank's certificate of deposits (CD) from P1 to P2, a one-year paper, also amply points out the lack of an exhaustive due-diligence exercise, the sources said.

Rating agencies, who also have been advocating the need to make dual rating mandatory, argue that the cost of a rating exercise is quite negligible — only around 0.1 per cent of the issue size.

They say that most top NBFCs even now obtain gradings from more than one agency, only to publish the most favourable rating. Besides, with four agencies — Crisil, Icra, Care and the latest entrant Duff & Phelps — operating in the country, there is no reason why dual ratings should not be made mandatory, they say.

In quite a few developing countries where four or more rating agencies operate, dual rating has been made mandatory. Examples are Chile, Argentina and Columbia. Mexico is also going ahead with dual rating.

Agencies said the strategy of companies to go shopping for a favourable rating was demonstrated in the Lloyds Finance case, where the company managed to get a higher rating from CARE (AAA) as it was not too happy with the rating assigned by Crisil (FA+) for its fixed deposit programme.

``This tendency among corporates to go shopping for securing a favourable rating will stop once dual rating is introduced,'' the managing director of a leading rating agency said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.