Post-CRB, credit rating agencies have been facing the flak for what is believed to be their poor performance, or inability to warn investors in time about investments which may turn sour soon.

P.K. Choudhury who is the managing director of ICRA, the second-largest of these agencies, spoke to Sunil Jain to explain how rating is done, the problems the agencies face as well as to discuss possible solutions to this.

One such solution could be, for example, that the regulator SEBI or RBI ask all agencies to submit details of each rating they have made, whether or not these have been accepted by their clients. Right now, around a third of the clients of these agencies do not publish their ratings. So if a bad rating is given, the public has no way of knowing this. If this is done, the authorities will then be able to get information on all companies including a host of top NBFCs and, if they feel it necessary, issue adequate warning to investors.

Are the rating agencies to blame for their failure to assess risk adequately in the case of companies like MidEast, CRB and ITC Classic?

Let me be clear at the outset that none of them were using our rating. Anyway, the three agencies taken together have completed about 3,500 assignments and those instances are not even one percent of the total number. While the rating is a detailed process based on several meetings as well as structured analysis of different documents and evidences which are verified, validated and cross-checked, no rating agency would be in a position to detect a cleverly designed deliberate fraud. We are not expected to be detectives.

You didn't rate these companies, or they didn't use your ratings since you rated them poorly?

We've rated a few of them and rated them differently. There is nothing wrong in two different rating agencies rating the same debt instrument differently. The sovereign rating of India by Moody's and S&P are different from each other. The rating opinions are based on objective and subjective analysis and the perceptions of the agencies on some of the subjective issues may differ. But such differences normally should not be very wide.

But how does the investor get to know which company to invest in if these are not made public? As per the terms of the mandate, we cannot disclose ratings till it is accepted. One way of solving this problem could be by insisting on dual rating for large volume debts. Another could be that regulators like RBI or SEBI obtain periodically the list of all ratings done by the agencies confidentially and compare them. If it is observed that the rating of one particular agency is higher than that of the others in almost all cases or differs very widely with the others, the regulator may counsel the agency to review their rating systems and standards.

So if RBI or SEBI wants your ratings for companies whether the company has accepted them or not you will give it? If the RBI says that I have doubts about 10 NBFCs, and I want the ratings you gave them (if they were rated), then all 4 agencies will have to give this information?

Yes.

What are the solutions to the impasse, and are you in favour of regulating the credit rating agencies?

Personally, I think if the regulation does not interfere with the independence of agencies in respect of their rating process or rating judgement, there's nothing wrong with some regulation. Regulate the ownership and management structure, ensure due dilligence standards are adhered to, and proper surveillance is done. This would help in reducing unethical and restrictive practices and ensure discipline.

Is every debt instrument rated?

No. Debentures which are redeemable or convertible within 18 months, and private placed debentures and bonds do not have to be rated. The fixed deposit programmes of some of the entities require rating and some others do not require rating fixed deposit programmes of manufacturing companies and of unregistered NBFCs, for example, do not have to be rated. But the rating agency has to look at the debt-service capability of the company in its totality, not just of the instrument that is being rated. A major problem occurs when an entity is not performing well and is apprehending downgrading. It then sometimes refuses to co-operate to give information. A comprehensive guideline is required to cover these aspects.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.